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[GRAPHIC OMITTED]
FLAG INVESTORS
MANAGED MUNICIPAL FUND CLASS A SHARES
(A Class of Managed Municipal Fund, Inc.)
Prospectus & Application -- March 1, 1998
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Managed Municipal Fund, Inc. (the "Fund") is designed to provide a high level
of total return with relative stability of principal and, secondarily, high
current income exempt from federal income tax through investment in a portfolio
consisting primarily of tax-free municipal obligations. To achieve this
objective, the Fund invests primarily in municipal obligations rated within the
three highest rating categories of Moody's Investors Service, Inc. or Standard
& Poor's Ratings Group.
Flag Investors Class A Shares of the Fund ("Class A Shares") are available
through your securities dealer or the Fund's transfer agent. (See "How to
Invest in the Fund.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated March 1, 1998 has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated herein by
reference. It is available upon request and without charge by calling the Fund
at (800) 767-FLAG.
TABLE OF CONTENTS
Fund Expenses ..................... 1
Financial Highlights .............. 2
Investment Program ................ 3
Investment Restrictions ........... 5
How to Invest in the Fund ......... 5
How to Redeem Shares .............. 8
Telephone Transactions ............ 8
Dividends and Taxes ............... 9
Management of the Fund ............ 10
Investment Advisor ................ 10
Administrator ..................... 10
Distributor ....................... 11
Custodian, Transfer Agent and
Accounting Services .......... 11
Performance Information ........... 11
General Information ............... 12
Application ....................... A-1
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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FUND EXPENSES
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Shareholder Transaction Expenses:
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ......................... None
Maximum Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) .................................... 0.50%*
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees (net of fee waivers) ......................................... 0.27%**
12b-1 Fees ................................................................... 0.25%
Other Expenses (net of fee waivers) .......................................... 0.38%
-------
Total Fund Operating Expenses (net of fee waivers) ........................... 0.90%**
=======
</TABLE>
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*If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a contingent
deferred sales charge when you redeem your shares. (See "How to Invest in the
Fund -- Offering Price.")
**The Fund's investment advisor and administrator intend, but are not obligated,
to waive their fees proportionately, to the extent required, so that Total
Fund Operating Expenses do not exceed 0.90% of the Fund's average daily net
assets. Absent fee waivers, Management Fees would be 0.40%, Other Expenses
(including administration fees) would be 0.45%, and Total Fund Operating
Expenses would be 1.10%, respectively, of the Fund's average daily net assets.
<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------- -------- --------- --------- ---------
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:* ...................... $54 $72 $93 $151
</TABLE>
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* Absent fee waivers, expenses would be higher.
The Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and
expenses that you will bear directly and indirectly when you invest in the
Fund. If you purchase Class A Shares through a financial institution, you may
be charged separate fees by the financial institution.
The rules of the SEC require that the maximum sales charge (in the Class A
Shares' case, 4.50% of the offering price) be reflected in the above table.
However, you may qualify for reduced sales charges or no sales charge at all.
(See "How to Invest in the Fund -- Offering Price".) Due to the continuous
nature of Rule 12b-1 fees, you may pay more than the equivalent of the maximum
front-end sales charges permitted by the Conduct Rules of the National
Association of Securities Dealers, Inc. if you hold your shares for a long
time.
1
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FINANCIAL HIGHLIGHTS
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The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by Coopers
& Lybrand L.L.P., the Fund's independent accountants. The financial statements
and financial highlights for the fiscal year ended October 31, 1997 and the
report thereon of Coopers & Lybrand L.L.P. are included in the Statement of
Additional Information. Additional performance information is contained in the
Fund's Annual Report for the fiscal year ended October 31, 1997, which can be
obtained at no charge by calling the Fund at (800) 767-FLAG.
(For a Share outstanding throughout each period)
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<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ......... $ 10.58 $ 10.65 $ 9.81
-------- -------- --------
Income from Investment
Operations:
Net investment income .......................... 0.52 0.48 0.48
Net realized and unrealized gain/(loss)
on investments ............................... 0.24 -- 0.98
-------- --------- --------
Total from Investment Operations ............... 0.76 0.48 1.46
-------- --------- --------
Less Distributions:
Distributions from net investment
income and net realized short-term
gains ........................................ ( 0.52) ( 0.54) ( 0.54)
Distributions from net realized mid-
term and long-term gains ..................... ( 0.03) ( 0.01) ( 0.08)
--------- --------- ---------
Total distributions ............................ ( 0.55) ( 0.55) ( 0.62)
--------- --------- ---------
Net asset value at end of period ............... $ 10.79 $ 10.58 $ 10.65
========= ========= =========
Total Return:(1)................................. 7.43% 4.67% 15.42%
Ratios to Average Daily Net Assets:
Expenses(3)..................................... 0.90% 0.90% 0.90%
Net investment income(5)........................ 4.46% 4.48% 4.72%
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares ................ $ 38,390 $ 41,193 $ 45,980
ISI Class Shares ............................. $ 79,003 $ 84,712 $ 86,292
Portfolio turnover rate ........................ 26% 32% 55%
<PAGE>
<CAPTION>
February 26,
1990
Year Ended October 31, through
------------------------------------------------------ October 31,
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ......... $ 11.10 $ 10.31 $ 10.36 $ 9.99 $ 10.00
--------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income .......................... 0.46 0.50 0.50 0.57 0.38
Net realized and unrealized gain/(loss)
on investments ............................... ( 1.15) 0.94 0.22 0.49 ( 0.02)
--------- -------- -------- -------- ---------
Total from Investment Operations ............... ( 0.69) 1.44 0.72 1.06 0.36
--------- -------- -------- -------- ---------
Less Distributions:
Distributions from net investment
income and net realized short-term
gains ........................................ ( 0.56) ( 0.61) ( 0.65) ( 0.69) ( 0.37)
Distributions from net realized mid-
term and long-term gains ..................... ( 0.04) ( 0.04) ( 0.12) -- --
--------- --------- --------- --------- ---------
Total distributions ............................ ( 0.60) ( 0.65) ( 0.77) ( 0.69) ( 0.37)
--------- --------- --------- --------- ---------
Net asset value at end of period ............... $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99
========= ========= ========= ========= =========
Total Return:(1) ................................ ( 6.49)% 14.36% 6.06% 10.85% 1.21%(2)
Ratios to Average Daily Net Assets:
Expenses(3)..................................... 0.90% 0.90% 0.90% 0.90% 0.90%(4)
Net investment income(5)........................ 4.37% 4.38% 4.78% 5.57% 6.12%(4)
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares ................ $ 49,903 $ 53,486 $ 45,536 $ 38,491 $ 5,698
ISI Class Shares ............................. $ 83,607 $ 88,378 $ 51,420 $ 20,053 $ 17,290
Portfolio turnover rate ........................ 37% 68% 95% 86% 99%
</TABLE>
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1 Total return excludes the effect of sales charge.
2 Flag Investors Class A Shares commenced operations on October 23, 1990.
3 Without the waiver of advisory and administration fees, the ratio of
expenses to average daily net assets would have been 1.10%, 1.13%, 1.10%,
1.11%, 1.14%, 1.27%, 1.47% and 1.92% for the periods ended October 31,
1997, 1996, 1995, 1994, 1993, 1992, 1991 and 1990, respectively.
4 Annualized.
5 Without the waiver of advisory and administration fees, the ratio of net
investment income to average daily net assets would have been 4.26%, 4.25%,
4.52%, 4.16%, 4.14%, 4.41%, 4.99% and 5.11% for the periods ended October
31, 1997, 1996, 1995, 1994, 1993, 1992, 1991 and 1990, respectively.
2
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INVESTMENT PROGRAM
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Investment Objective, Policies and Risk
Considerations
The investment objective of the Fund is a high level of total return with
relative stability of principal, and secondarily, a high level of current income
exempt from federal income tax through investing in a portfolio consisting
primarily of municipal obligations ("Municipal Obligations"). Municipal
Obligations include securities of states, territories and possessions of the
United States and the District of Columbia, and their political subdivisions,
agencies and instrumentalities, the interest on which is exempt from federal
income tax in the opinion of bond counsel for the issuer. Under normal market
conditions, the Fund will invest at least 80% of its net assets in Municipal
Obligations. The Fund does not currently intend to acquire Municipal Obligations
that are subject to alternative minimum tax but may so invest up to 20% of its
net assets. There can be no assurance that the Fund will achieve its investment
objective.
The Fund will invest at least 75% of its portfolio of Municipal
Obligations in securities rated, on the date of investment, A-1 or higher (in
the case of municipal bonds) and higher than MIG 3 (in the case of municipal
notes) by Moody's Investors Service, Inc. ("Moody's") or rated A+ or higher (in
the case of municipal bonds) and higher than SP-2 (in the case of municipal
notes) by Standard & Poor's Ratings Group ("S&P") or, if unrated, of comparable
quality as determined by the Fund's investment advisor under criteria approved
by the Board of Directors. The Fund may invest up to 25% of its portfolio of
Municipal Obligations in securities rated A (in the case of municipal bonds) or
MIG 3 (in the case of municipal notes) by Moody's or rated A (in the case of
municipal bonds) or SP-2 (in the case of municipal notes) by S&P or, if
unrated, of comparable quality as determined by the investment advisor under
criteria approved by the Board of Directors.
Even under normal circumstances the Fund may invest to a limited extent
in taxable obligations depending on market conditions. These obligations may
include U.S. Government and agency, bank and corporate securities and
repurchase agreements collateralized by such securities. For temporary
defensive purposes, the Fund may invest without limit in short-term obligations
of these types. The Fund may also invest in financial futures, "when-issued"
securities, standby commitments of brokers, dealers or banks and variable and
floating rate demand obligations. These investment practices, which may involve
certain special risks, are described below.
Selection of Investments
The Fund's investment advisor (the "Advisor" -- see "Investment Advisor")
buys and sells securities for the Fund's portfolio with a view toward, first, a
high level of total return with relative stability of principal and, second,
high current income that is federally tax exempt. Therefore, in addition to
yield, the potential for capital gains and appreciation resulting from possible
changes in interest rates will be a consideration in selecting investments.
While income distributions to shareholders will generally be tax exempt,
distributions of capital gains will be taxable. Accordingly, to the extent the
Fund achieves its investment objective, a larger portion of its distribution
will be taxable than would be the case if the Fund placed a greater emphasis on
earning tax exempt income. (See "Investment Program -- Taxable Investments" and
"Dividends and Taxes -- Tax Treatment of Dividends and Distributions.") The
Advisor will be free to take full advantage of the entire range of maturities
offered by Municipal Obligations and may adjust the average maturity of the
Fund's portfolio from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its expectations of
future changes in interest rates. Thus, at certain times the average maturity
of the portfolio may be relatively short (under five years, for example) and at
other times may be relatively long (in the 20-30 year range, for example). In
determining which direction interest rates are likely to move, the Advisor
relies on the economic analysis made by its chairman, Edward S. Hyman. There is
no assurance that such economic analysis will accurately predict interest rate
trends or that the portfolio strategies based on Mr. Hyman's economic analysis
will be effective.
Special Risk Considerations
As with other debt securities, the value of Municipal Obligations changes
as interest rates fluctuate. Changes in the value of portfolio securities will
not affect interest income from those securities but will be reflected in the
Fund's net asset value. Thus, a decrease in interest rates will generally
result in an increase in the value of the Shares. Conversely, during periods of
rising interest rates, the value of the Shares will generally decline. The
magnitude of these fluctuations will generally be greater at times when the
average maturity of the Fund's portfolio securities is longer.
3
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Purchase of When-Issued Securities
New issues of Municipal Obligations are usually offered on a when-issued
basis, which means that delivery and payment for such Municipal Obligations
normally take place within 45 days after the date of the commitment to
purchase. The payment obligation and the interest rate that will be received on
a when-issued security are fixed at the time the purchase commitment is entered
into, although no interest on such security accrues to the Fund prior to
payment and delivery. A segregated account of the Fund consisting of cash or
other liquid securities equal at all times to the amount of the when-issued
commitments will be established and maintained by the Fund at the Fund's
custodian. While the Fund will purchase securities on a when-issued basis only
with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date to limit the effects of adverse market
action. The value of when-issued securities is subject to market fluctuation.
The Fund will ordinarily invest no more than 40% of its net assets at any time
in when-issued securities.
Acquisition of Stand-by Commitments
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, a broker,
dealer or bank is obligated to repurchase, at the Fund's option, specified
securities in the Fund's portfolio at a specified price. In this respect,
stand-by commitments are comparable to put options and thus the Fund's ability
to enforce such obligations is subject to the risk that the seller of the
commitment may default on its obligations. The Fund will acquire stand-by
commitments as a means of changing the average maturity of its portfolio in
response to expected changes in market interest rates.
The Fund anticipates that stand-by commitments will generally be
available from brokers, dealers and banks without the payment of any direct or
indirect consideration, but the Fund may have to pay for stand-by commitments,
thus increasing the cost of acquiring and holding the underlying security and
similarly decreasing such security's yield. Gains realized in connection with
stand-by commitments will be taxable.
Purchase of Variable and Floating Rate Demand Obligations
The Fund may purchase floating and variable rate demand notes and bonds,
which are tax-exempt obligations normally having stated maturities in excess of
one year, but which permit the holder to demand payment of principal either at
any time or at specified intervals. The interest rates on these obligations
fluctuate from time to time in response to changes in the market interest
rates. Frequently, such obligations are secured by letters of credit or other
credit support arrangements provided by banks. Each demand note and bond
purchased by the Fund will meet the quality criteria established for the
purchase of other Municipal Obligations. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations, although they are
redeemable at face value. The Fund will not invest more than 10% of its net
assets in floating or variable rate demand obligations as to which the Fund
cannot exercise the demand feature on less than seven days' notice if there is
no secondary market available for these obligations.
Investments in Futures Contracts
The Fund may purchase and sell U.S. exchange traded futures contracts on
bond indices ("Futures Contracts"). At the same time a Futures Contract is
purchased or sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). The initial deposit varies but may be as low as 5%
or less of the value of the contract. Daily thereafter, the Futures Contract is
valued and the payment of "variation margin" may be required, so each day the
Fund would provide or receive cash that reflects any decline or increase in the
contract's value.
These instruments will be used only to protect against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of the Futures Contract and may realize a loss on the Futures Contract
in excess of any corresponding gain in the hedged portfolio positions. Futures
transactions involve other risks as well. For example, a lack of correlation
between the index and the assets being hedged, or unexpected adverse price
movements, could render the Fund's hedging strategy unsuccessful and could
result in losses on the Futures Contract in excess of any corresponding gain in
the hedged portfolio positions. In addition, there can be no assurance that a
liquid secondary market will exist for any Futures Contract purchased or sold,
and the Fund may be required to maintain a position until exercise or
expiration, which could result in losses on the Futures Contract in excess of
any corresponding gain in the hedged portfolio positions.
Regulations of the Commodity Futures Trading Commission (the "CFTC")
permit the use of futures transactions for bona fide hedging purposes without
regard to the percentage of assets committed to futures
4
<PAGE>
margin and options premiums. CFTC regulations allow funds to employ futures
transactions for other "non-hedging" purposes to the extent that aggregate
initial futures margins and options premiums do not exceed 5% of total assets.
The Fund will not enter into Futures Contracts if obligations under all Futures
Contracts would amount to more than 30% of its total assets.
Investments in Repurchase Agreements
The Fund may agree to purchase U.S. Treasury Securities from creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. U.S. Treasury Securities are direct obligations of the U.S. Government
and are supported by the full faith and credit of the United States. Default by
or bankruptcy proceedings with respect to the seller may, however, expose the
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying obligations.
Taxable Investments
From time to time, the Fund may invest in securities, the interest on
which is subject to federal income tax. The Fund may make such investments (a)
pending investment of proceeds from sales of Fund shares or portfolio
securities in tax-exempt securities, (b) pending settlement of purchases of
portfolio securities, (c) to maintain liquidity for meeting anticipated
redemptions, or (d) when in the Advisor's opinion it is advisable because of
adverse conditions affecting the market for Municipal Obligations. The taxable
investments in which the Fund may invest consist of U.S. Treasury Securities
and repurchase agreements fully collateralized by U.S. Treasury Securities
(collectively, the "Taxable Investments"). The Fund may invest up to 20% of its
net assets in Taxable Investments. The Fund may earn taxable income from other
sources. Dividends paid by the Fund that are attributable to interest earned
from Taxable Investments and to taxable income from other investments will be
taxable to you. (See "Dividends and Taxes -- Tax Treatment of Dividends and
Distributions.")
Size of Fund
The Fund currently intends to limit the size of the Fund and to accept
share purchases only from existing shareholders at such time as the assets of
the Fund are in excess of $200 million but less than $250 million, and
thereafter not to accept any share purchases other than dividend reinvestments.
INVESTMENT RESTRICTIONS
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The investment restrictions recited below are matters of fundamental
policy and may not be changed without shareholder approval. Accordingly, the
Fund will not:
1) Concentrate 25% or more of its total assets in securities of issuers in any
one industry (for this purpose, the U.S. Government or any state or local
government or their agencies and instrumentalities are not considered to
be an industry);
2) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for this purpose, the U.S.
Government or its agencies and instrumentalities are not considered to be
an issuer and, in the case of Municipal Obligations, the public or private
entity ultimately responsible for payment of principal and interest on the
security is considered to be the issuer); or
3) Invest more than 10% of its total assets in illiquid securities, including
repurchase agreements with maturities of greater than seven days and
floating or variable rate demand obligations as to which the Fund cannot
exercise the demand feature on less than seven days' notice if there is no
secondary market available for these obligations.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
HOW TO INVEST IN THE FUND
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You may purchase Class A Shares through your securities dealer or through
any financial institution that is authorized to service shareholder accounts
("Shareholder Servicing Agents"). You may also purchase Class A Shares by
completing the Application Form attached to this Prospectus and returning it,
together with payment of the purchase price, to the address shown on the
Application Form.
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
5
<PAGE>
o If you are a shareholder of any other Flag Investors fund, your initial
investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. Subsequent investments may
be as low as $100 if made monthly, but must be $250 if done quarterly.
(See "Purchases Through Automatic Investing Plan" below).
You may purchase Class A Shares on any day on which the New York Stock
Exchange is open for business (a "Business Day"). Your purchase order will be
executed at a per share purchase price equal to the net asset value next
determined after it is received plus any applicable front-end sales charge (the
"Offering Price"). If your purchase is made by mail, it must be accompanied by
payment of the Offering Price. Purchases made through your securities dealer or
Shareholder Servicing Agent must be in accordance with their payment
procedures.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
The net asset value per share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing its
share of the Fund's assets, deducting all liabilities attributable to that
class, and dividing the resulting amount by the number of then outstanding
shares of the class. For this purpose, portfolio securities will be given their
market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved by the Fund's Board of
Directors.
Offering Price
Your share purchase is made at the Offering Price, which includes a sales
charge which is calculated as a percentage of the Offering Price and decreases
as the amount of purchase increases, as shown below:
<TABLE>
<CAPTION>
Sales Charge Dealer
as Percentage of
------------------------- Compensation
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
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<S> <C> <C> <C>
Less than $ 50,000 ......... 4.50% 4.71% 4.00%
$ 50,000 - $ 99,999 ......... 3.50% 3.63% 3.00%
$ 100,000 - $249,999 ......... 2.50% 2.56% 2.00%
$ 250,000 - $499,999 ......... 2.00% 2.04% 1.50%
$ 500,000 - $999,999 ......... 1.50% 1.52% 1.25%
$1,000,000 and over ........... None* None* None*
- --------------------------------------------------------------------------------
</TABLE>
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be subject to a contingent
deferred sales charge when you redeem your shares (See below.) The Fund's
distributor may make payments to your securities dealer or Shareholder
Servicing Agent in an amount up to 0.50% of the Offering Price.
<PAGE>
You may obtain reduced sales charges as set forth in the table above by
accumulating purchase orders for, and existing investments in, Class A Shares of
this Fund and Class A or Class D shares of any other Flag Investors fund. The
applicable sales charge will be determined based on the total value of your
current purchases plus the value of your existing investments. (For this
purpose existing investments will be valued at the higher of cost or current
value.) You may combine your purchases and investments with those of your
spouse and your children under the age of 21 for this purpose.
To obtain the reduced sales charge through this right of accumulation,
you must provide your securities dealer or Shareholder Servicing Agent with
sufficient information to verify that you have such a right. The Fund may amend
or terminate this right of accumulation at any time as to subsequent purchases.
You may also obtain the reduced sales charges shown above by executing a
written Letter of Intent that states your intention to invest at least $50,000
within a 13-month period in Class A Shares. Each purchase of Class A Shares
under a Letter of Intent will be made at the Offering Price applicable at the
time of such purchase to the full amount indicated on the Letter of Intent. A
Letter of Intent does not require that you purchase the full amount indicated.
The minimum initial investment under a Letter of Intent is 5% of the full
amount. Shares purchased with the first 5% of the full amount will be held in
escrow (while remaining registered in your name) to secure payment of the
higher sales charge applicable to the Class A Shares actually purchased if you
do not purchase the full amount. Such escrowed shares will be redeemed to pay
the additional sales charge, if necessary. When the full amount indicated has
been purchased, the escrowed shares will be released. If you wish to enter into
a Letter of Intent in conjunction with an investment in Class A Shares, you may
do so by completing the appropriate section of the Application Form attached to
this Prospectus.
You will not be charged a sales charge on purchases of $1 million or more
of Class A Shares. You may, however, be required to pay a contingent deferred
sales charge if you redeem the purchased shares within 24 months. The charge
will be made at the rate of 0.50% on the lesser of the value of the Class A
Shares redeemed or the total cost of such shares. No contingent deferred sales
charge will be imposed on purchases of $3 million or more if your securities
dealer has agreed to return to the Fund's distributor (the
6
<PAGE>
"Distributor") any payments received on the sale of such shares. In determining
whether a contingent deferred sales charge is payable, and, if so, the amount
of the charge, it is assumed that Class A Shares not subject to such charge are
the first redeemed followed by other Class A Shares held for the longest period
of time.
You may purchase Class A Shares at net asset value (without sales charge)
under any of the following circumstances:
1) If you are purchasing shares in any of the following types of accounts:
(i) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or
securities dealer purchasing shares on your behalf. To qualify for
this provision you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee
by your broker or agent if you purchase shares in this manner;
(ii) A qualified retirement plan;
(iii) A Flag Investors fund payroll savings plan program.
2) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.
3) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a full
description of the conditions).
4) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following or their respective affiliates: the Distributor, the Advisor,
the Fund's administrator, and any broker-dealer authorized to sell Class A
Shares.
You may also purchase Class A Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
Purchases by Exchange
You may exchange Class A Shares of any other Flag Investors fund with the
same sales charge structure for an equal dollar amount of Class A Shares without
payment of the sales charges described above or any other charge. In addition,
you may exchange Class A Shares of any Flag Investors fund with a lower sales
charge (with the exception of Flag Investors Cash Reserve Prime Class A Shares)
for an equal dollar amount of Class A Shares if you have owned the shares you
are redeeming for at least 24 months. If you have owned them for less than 24
months, you may exchange them for Class A Shares if you pay the difference in
sales charges. You may enter both your redemption and purchase orders on the
same Business Day or, if you have already redeemed the shares of the other fund,
you may enter your purchase order within 90 days of the redemption.
When you acquire Class A Shares through an exchange from another fund in
the Flag Investors family of funds, the period for which the original shares
were held prior to the exchange will be combined with the holding period of the
shares acquired in the exchange for purposes of determining what, if any,
contingent deferred sales charge is applicable when those shares are redeemed.
The net asset value of shares purchased and redeemed in an exchange
request received on the same Business Day will be determined on that day,
provided that the exchange request is received prior to 4:00 p.m. (Eastern Time)
or the close of the New York Stock Exchange, whichever is earlier. Exchange
requests received after 4:00 p.m. (Eastern Time) will be effected on the next
Business Day.
You may exercise this exchange privilege by telephone. (See "Telephone
Transactions" below.)
The Fund may modify or terminate this offer of exchange at any time upon
60 days' prior written notice.
<PAGE>
Purchases Through Automatic Investing Plan
You may elect to have a specified amount invested monthly or quarterly in
Class A Shares. The amount specified will be withdrawn from your checking
account using a pre-authorized check and will be invested in Class A Shares at
the applicable Offering Price determined on the date the amount is available
for investment. Participation in the Automatic Investing Plan may be
discontinued either by you or the Fund upon 30 days' prior written notice to
the other party. If you wish to enroll in the Automatic Investing Plan or if
you wish to obtain additional information, complete the appropriate section of
the Application Form attached to this Prospectus.
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income dividends and net capital gains
distributions will be reinvested in additional Class A Shares at net asset
value. You may elect to receive your distributions in cash or to terminate
automatic reinvestment by completing the appropriate section of the attached
Application Form or by giving written notice to the Fund's transfer agent (the
"Transfer Agent") at the address listed on the inside back cover of this
Prospectus, either directly or
7
<PAGE>
through your securities dealer or Shareholder Servicing Agent, at least five
days before the next date on which dividends or distributions will be paid.
You may also have your distributions invested in shares of other funds in
the Flag Investors family of funds. Call your securities dealer or the Transfer
Agent for additional information.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem all or part of your investment on any Business Day
through your securities dealer, your Shareholder Servicing Agent or the Transfer
Agent. You may redeem up to $50,000 worth of Class A Shares by telephone. (See
"Telephone Transactions" below.) A redemption order is effected at the net asset
value per share (reduced by any applicable contingent deferred sales charge)
next determined after receipt of your order (or, if stock certificates have been
issued for the Class A Shares to be redeemed, after you tender the stock
certificates for redemption). Redemption orders received after 4:00 p.m.
(Eastern Time) or the close of the New York Stock Exchange, whichever is
earlier, will be effected at the net asset value next determined on the
following Business Day. You will be paid for redeemed shares by check which will
be mailed within seven days after your redemption order is received in proper
form.
The Transfer Agent, your securities dealer or your Shareholder Servicing
Agent may require the following documents in order to redeem your shares:
1) A letter of instructions, specifying your account number and the number of
Class A Shares or dollar amount to be redeemed, signed by all owners of
the Class A Shares in the exact names in which the account is maintained;
2) For redemptions in excess of $50,000, a guarantee of your signature by a
member of the Federal Deposit Insurance Corporation, a trust company,
broker, dealer, credit union (if authorized under state law), securities
exchange or association, clearing agency, or savings association;
3) If Class A Shares are held in certificate form, stock certificates either
properly endorsed or accompanied by a duly executed stock power for Class
A Shares to be redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of Class A Shares will be
paid on the next dividend payable date. If all of the Class A Shares in your
account have been redeemed on a dividend payable date, the dividend will be
remitted to you by check.
The Fund has the power, under its Articles of Incorporation, to redeem
your account upon 60 days' written notice if its value falls below $500 due to
your redemptions.
Systematic Withdrawal Plan
If you hold Class A Shares having a value of $10,000 or more you may
arrange to have a portion of your Class A Shares redeemed monthly or quarterly
under the Fund's Systematic Withdrawal Plan. Such payments are drawn from income
dividends, and, to the extent necessary, from share redemptions (which would be
a return of principal and, if reflecting a gain, would be taxable). If
redemptions continue, your account may eventually be exhausted. Because Class A
Share purchases include a sales charge that you will not recover at the time of
redemption, you should not have a withdrawal plan in effect at the same time you
are making recurring purchases. If you wish to participate in the Fund's
Systematic Withdrawal Plan, complete the appropriate section of the Application
Form attached to this Prospectus.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
You may redeem Class A Shares in amounts up to $50,000 or exchange
Class A Shares in any amount, by notifying the Transfer Agent by telephone on
any Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time).
Telephone transaction privileges are automatic unless you specifically request
that no telephone redemptions or exchanges be accepted for your account. This
election may be made on the Application Form or at any time thereafter by
completing and returning appropriate documentation supplied by the Transfer
Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
8
<PAGE>
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred sales
charge on redemptions) next determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring you to provide certain personal identification
information at the time your account is opened and prior to effecting each
transaction requested by telephone. You may be required to provide additional
telecopied instructions. If these procedures are employed, neither the Fund nor
the Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that either of them reasonably
believes to be genuine. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may
experience difficulty in effecting telephone transactions. In such event,
requests should be made by mail. Class A Shares held in certificate form may not
be exchanged or redeemed by telephone. (See "How to Invest in the Fund --
Purchases by Exchange" and "How to Redeem Shares.")
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of monthly dividends. The Fund may
distribute to shareholders any net capital gains (the excess of net long-term
capital gains over net short-term capital losses) on an annual basis or,
alternatively, may elect to retain such net capital gains and pay tax thereon.
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial, or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are advised to consult with your tax advisor regarding any
specific questions.
The Statement of Additional Information sets forth further information
concerning taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As long as the Fund qualifies for this tax treatment, it
will be relieved of federal income tax on amounts distributed to shareholders.
The Fund also intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for federal excise tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of obligations the interest on which is exempt from federal income
tax.
<PAGE>
As long as this and certain other requirements are met, dividends derived
from the Fund's net tax-exempt interest income will be "exempt-interest
dividends" that are excluded from your gross income for federal income tax
purposes. Exempt-interest dividends may, however, have collateral federal
income tax consequences, including alternative minimum tax consequences.
Furthermore, the Fund may not be an appropriate investment for you if you are a
"substantial user" of facilities financed with industrial development bonds or
private activity bonds (or a related party to a "substantial user"). (See the
Statement of Additional Information.)
Current federal tax law limits the types and volume of bonds qualifying
for the federal income tax exemption of interest, which may have an effect on
the ability of the Fund to purchase sufficient amounts of tax-exempt securities
to satisfy the Code's requirements for the payment of exempt interest
dividends.
You will be taxed on distributions from the Fund out of net investment
income that is not tax-exempt interest and out of net short-term capital gains
as ordinary income, whether such distributions are paid to you in cash or in
additional Class A Shares.
You will be taxed on distributions from the Fund out of net capital gains
as gains from the sale or exchange of a capital asset held for more than one
year, whether paid to you in cash or additional Class A Shares, and regardless
of how long you have held the shares. You will be advised annually as to the
federal income tax status of distributions made during the year.
Ordinarily, you should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the following year, will be deemed
for tax purposes to have been received by you and paid by the Fund in the year
in which the dividends were declared.
9
<PAGE>
The sale, exchange or redemption of Class A Shares is a taxable event for
you.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry Class A Shares will not be deductible for federal income tax
purposes.
The Fund may not be a suitable investment for tax-exempt shareholders and
plans because such shareholders and plans would not gain any additional benefit
from the receipt of exempt-interest dividends.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributors, administrator, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to its distributors, to the Advisor and to the Fund's
administrator. A majority of the Directors of the Fund have no affiliation with
the Distributor, the Advisor or the Fund's administrator.
INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
International Strategy & Investment Inc. ("ISI" or the "Advisor"), a
registered investment advisor, serves as investment advisor to the Fund
pursuant to an investment advisory agreement dated as of April 1, 1991. ISI
employs Messrs. Edward S. Hyman and R. Alan Medaugh. Due to their stock
ownership, Messrs. Hyman and Medaugh may be deemed to be controlling persons of
ISI. As of December 31, 1997, the Advisor had approximately $510 million under
management representing both tax-free and taxable accounts. The Advisor also
acts as investment advisor to Total Return U.S. Treasury Fund, Inc., North
American Government Bond Fund, Inc. and ISI Strategy Fund, Inc., open-end
management investment companies with approximately $358 million of aggregate
net assets as of December 31, 1997.
As compensation for its services for the fiscal year ended October 31,
1997, the Advisor received a fee (net of fee waivers) equal to 0.27% of the
Fund's average daily net assets. The Advisor and the Fund's administrator, have
voluntarily agreed to reduce proportionately their respective annual fees if
necessary, so that the Fund's annual expenses do not exceed 0.90% of its average
daily net assets. (See "Fund Expenses.")
Portfolio Managers
Edward S. Hyman, Chairman of ISI and the Fund, and R. Alan Medaugh,
President of ISI and President and a Director of the Fund, have shared direct
portfolio management responsibility for the Fund since its inception. Mr. Hyman
is responsible for developing the economic analysis upon which the Fund's
selection of investments is based. (See "Investment Program.") Before joining
ISI, Mr. Hyman was a vice chairman and member of the Board of C.J. Lawrence
Inc. and prior thereto, an economic consultant at Data Resources. He writes a
variety of international and domestic economic research reports which follow
trends that may determine the direction of interest rates. These international
and domestic reports are sent to ISI's private institutional clients in the
United States and overseas. The periodical Institutional Investor, which rates
analysts and economists on an annual basis has rated Mr. Hyman as its "first
team" economist, which is its highest rating, in each of the last eighteen
years.
Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam Management
Company and Fidelity Management and Research.
ADMINISTRATOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of
Bankers Trust New York Corporation, provides administration services to the
Fund. ICC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which the
shares are distributed and oversight of the relationship between the Fund and
its other service providers. As compensation for these services for the fiscal
year ended October 31, 1997, ICC received a fee (net of fee waivers) equal to
0.14% of the
10
<PAGE>
Fund's average daily net assets. ICC and ISI have voluntarily agreed to reduce
proportionately their respective annual fees if necessary, so that the Fund's
annual expenses do not exceed 0.90% of its average daily net assets. (See "Fund
Expenses.")
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of the Class A Shares since August 31, 1997. ICC
Distributors is a registered broker-dealer that offers distribution services to
a variety of registered investment companies including other funds in the Flag
Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc. ICC
Distributors is not affiliated with the Fund's administrator.
The Fund has adopted a Distribution Plan for the Class A Shares (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended. As compensation for its services for the period from August 31, 1997
through October 31, 1997, the Distributor received a fee equal to 0.25%
(annualized) of the Class A Shares' average daily net assets. The Distributor
may allocate on a proportional basis up to all of its fee to selected
securities dealers as compensation for their ongoing shareholder services,
including processing redemption and sale requests and responding to shareholder
inquiries.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, including certain banks and BT Alex. Brown
Incorporated, to provide shareholder services, pursuant to which the
Distributor may allocate on a proportional basis up to all of its distribution
fee as compensation for such financial institutions' ongoing shareholder
services. Such financial institutions may charge you separately for these
services.
Payments under the Plan are made as described above regardless of the
Distributor's actual cost of providing distribution services and may be used to
pay the Distributor's overhead expenses. If the cost of providing distribution
services is less than the payments received, the Distributor will retain the
unexpended portion of the distribution fee. The Distributor or the Fund's
administrator, and their respective affiliates, may make payments from their
own resources to securities dealers or Shareholder Servicing Agents. Payments
by the Distributor will include additional discounts or promotional incentives
in the form of cash or other compensation (including merchandise or travel).
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp., is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services for the fiscal year ended October 31, 1997,
ICC received from the Fund a fee equal to 0.05% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
Corporation, acts as custodian of the Funds' assets. (See the Statement of
Additional Information.)
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
relevant indices. All such advertisements will show the average annual total
return, net of the Fund's maximum sales charge, over one-, five- and ten-year
periods or, if such periods have not yet elapsed, shorter periods corresponding
to the life of the Fund. Such total return quotations will be computed by
finding the average annual compounded rates of return over such periods that
would equate an assumed initial investment of $1,000 to the ending redeemable
value, net of the maximum sales charge and other fees, according to the
required standardized calculation. The standardized calculation is required by
the SEC to provide consistency and comparability in investment company
advertising and is not equivalent to a yield calculation.
The Fund may also advertise yield and tax-equivalent yield quotations. Any
yield quotation of the Fund is based on the annualized net investment income
per share of the Fund over a 30-day period. The yield for the Fund is
calculated by dividing the net investment income per share of the Fund earned
during the
11
<PAGE>
period by the maximum offering price per share of the Fund on the last day of
that period. The resulting figure is then annualized. The Fund's yield
calculations assume a maximum sales charge of 4.50% for the Class A Shares. The
Fund's taxable-equivalent yield is calculated by determining the rate of return
that would have to be achieved on a fully taxable investment to produce the
after tax equivalent of the Fund's yield. In calculating taxable-equivalent
yield, the Fund assumes certain tax brackets for shareholders.
If the Fund compares its performance to other funds or to relevant indices,
its performance will be stated in the same terms in which such comparative data
and indices are stated.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Municipal
Bond Index, the Consumer Price Index, the return on 90 day U.S. Treasury Bills,
long-term U.S. Treasury bonds, bank certificates of deposit, the Standard &
Poor's 500 Stock Index and the Dow Jones Industrial Average. The Fund may also
use total return performance data as reported in the following national
financial and industry publications that monitor the performance of mutual
funds: Money Magazine, Forbes, Business Week, Barron's, Investor's Daily,
IBC/Donoghue's Money Fund Report and The Wall Street Journal. For these
purposes, the performance of the Fund, as well as the performance of such
indices, may not reflect sales charges, the inclusion of which would reduce
performance results.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund. Performance
is generally a function of the type and quality of investments held by the Fund,
operating expenses and market conditions. Any fees charged by your bank with
respect to the account through which your Class A Shares may be purchased,
although not included in calculations of performance, will reduce your
performance results.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Capital Shares
The Fund is an open-end, diversified management investment company organized
under the laws of the State of Maryland on January 5, 1990, and is authorized to
issue 40 million shares of capital stock, with a par value of $.001 per share.
Shares of the Fund have equal rights with respect to voting. Voting rights are
not cumulative, so the holders of more than 50% of the outstanding shares of
capital stock voting together for election of Directors may elect all the
members of the Board of Directors of the Fund. In the event of liquidation or
dissolution of the Fund, each share is entitled to its portion of the Fund's
assets after all debts and expenses have been paid. The fiscal year-end of the
Fund is October 31.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests in
a separate portfolio of securities, and separate classes of each series of the
Fund. The shares offered by this Prospectus have been designated "Flag Investors
Managed Municipal Fund Class A Shares." The Board has no present intention of
establishing any additional series of the Fund but the Fund does have another
class of shares in addition to the shares offered hereby, "ISI Managed Municipal
Fund Shares." Shares of that class are sold through broker-dealers. Different
classes of the Fund may be offered to certain investors and holders of such
shares may be entitled to certain exchange privileges not offered to Class A
Shares. All classes of the Fund share a common investment objective, portfolio
and advisory fee, but the classes may have different distribution expenses and
sales charges and, accordingly, performance may differ.
Annual Meetings
Unless required by Maryland law, the Fund does not expect to hold annual
meetings of shareholders. However, shareholders of the Fund retain the right,
under certain circumstances, to request that a meeting of shareholders be held
for the purpose of considering the removal of a Director from office, and if
such a request is made, the Fund will assist with shareholder communications in
connection with the meeting.
Reports
You will be furnished with semi-annual reports containing information about
the Fund and its operations, including a list of investments held in the Fund's
portfolio and financial statements. The annual financial statements are audited
by the Fund's independent accountants, Coopers & Lybrand L.L.P.
Shareholders Inquiries
If you have questions concerning your shares, you should contact the
Transfer Agent at (800) 553-8080, the Fund at (800) 767-FLAG, or your securities
dealer or Shareholder Servicing Agent.
12
<PAGE>
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<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND CLASS A SHARES
(A Class of Managed Municipal Fund, Inc.)
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022
Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101
Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
1-800-553-8080
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND CLASS A SHARES
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "Flag Investors Managed Municipal
Fund Class A Shares" and mail with this Application to:
Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Managed Municipal Fund Class A Shares
I enclose a check for $_____ payable to "Flag Investors Managed Municipal
Fund Class A Shares" for the purchase of Flag Investors Managed Municipal Fund
Class A Shares.
For assistance in completing this Application please call: 1-800-553-8080,
Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
To open an IRA account, please call 1-800-767-3524 to request an IRA
information kit.
Your Account Registration (Please Print)
Existing Account No., if any:_________
Individual or Joint Tenant
- --------------------------------------
First Name Initial Last Name
- --------------------------------------
Social Security Number
- --------------------------------------
Joint Tenant Initial Last Name
Corporations, Trusts, Partnerships, etc.
- --------------------------------------------------------
Name of Corporation, Trust or Partnership
- ---------------- ----------------
Tax ID Number Date of Trust
- --------------------------------------------------------
Name of Trustees (If to be included in the Registration)
- --------------------------------------------------------
For the Benefit of
Gifts to Minors
- --------------------------------------------------------
Custodian's Name (only one allowed by law)
- --------------------------------------------------------
Minor's Name (only one)
- --------------------------------------------------------
Social Security Number of Minor
under the __________________ Uniform Gifts to Minors Act
State of Residence
Mailing Address
- --------------------------------------------------------
Street
- --------------------------------------------------------
City State Zip
( )
- --------------------------------------------------------
Daytime Phone
<PAGE>
Letter of Intent (Optional)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Flag Investors Managed Municipal Fund Class A
Shares, as shown below, in an aggregate amount at least equal to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
Right of Accumulation (Optional)
List the Account numbers of other Flag Investors Funds that you or your
immediate family already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
- --------- ----------- ------------ ------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Distribution Options
Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional Class A Shares of the Fund at no
sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
A-1
<PAGE>
Automatic Investing Plan (Optional)
[ ] I authorize you as Agent for the Automatic Investing Plan to automatically
invest $________ for me, on a monthly or quarterly basis, on or about the 20th
of each month or if quarterly, the 20th of January, April, July and October, and
to draw a bank draft in payment of the investment against my checking account.
(Bank drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250
Subsequent Investments [ ] Monthly ($100 minimum) [ ] Quarterly
(check one): ($250 minimum)
Please attach a voided check.
_____________________________ ____________________________________
Bank Name Depositor's Signature Date
_____________________________ ____________________________________
Existing Flag Investors Depositor's Signature Date
Fund Account No., if any (if joint acct., both must sign)
Systematic Withdrawal Plan (Optional)
[ ] Beginning the month of _______, 19__ please send me checks on a monthly or
quarterly basis, as indicated below, in the amount of $_______, from Class A
Shares that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000.)
Frequency (check one): [ ] Monthly [ ] Quarterly (January, April, July and
October)
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect to
other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/we do not want: [ ] Telephone redemption privileges [ ] Telephone exchange
privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank:_________________________ Account No.: __________________________
Address:_________________________ Bank Account Name: __________________________
Signature and Taxpayer Certification
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding
is not an additional tax, and any amounts withheld may be credited against
your ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as
required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup withholding,
or (b) I have not been notified by the Internal Revenue Service ("IRS")
that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above, I
have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this Application or if I fail to furnish my
correct Social Security Number or Tax ID Number, I may be subject to a
penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may request
such form by calling the Transfer Agent at 800-553-8080.)
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes: ____________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
<PAGE>
I have received a copy of the Fund's prospectus. I acknowledge that the
telephone redemption and exchange privileges are automatic and will be effected
as described in the Fund's current prospectus (see "Telephone Transactions"). I
also acknowledge that I may bear the risk of loss in the event of fraudulent
use of such privileges. If I do not want telephone redemption or exchange
privileges, I have so indicated on this Application.
The Internal Revenue Service does not require your consent to any provision
of this document other than the certifications required to avoid backup
withholding.
- ------------------------- ---------------------------------------------------
Signature Date Signature (if joint acct., both must sign) Date
- --------------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name: ______________________ Dealer Code: _______________________
Dealer's Address:______________________ Branch Code: _______________________
______________________
Representative: ______________________ Rep. No.: _______________________
A-2
<PAGE>
ISI MANAGED MUNICIPAL FUND SHARES
(A Class of Managed Municipal Fund, Inc.)
717 Fifth Avenue
New York, NY 10022
For information call (800) 955-7175
The investment objective of this mutual fund (the "Fund") is a high level
of total return with relative stability of principal and, secondarily, high
current income exempt from federal income tax through investment in a portfolio
consisting primarily of tax-free municipal obligations. To achieve this
objective, the Fund invests primarily in municipal obligations rated within the
three highest rating categories of Moody's Investors Service, Inc. or Standard
& Poor's Ratings Group.
Shares of the ISI class of the Fund ("Shares") are available through
International Strategy & Investment Group Inc., (the "Distributor"), as well as
your securities dealer or shareholder servicing agent. (See "How to Invest in
the Fund.")
This Prospectus sets forth basic information that you should know about
the Fund prior to investing. You should retain it for future reference. A
Statement of Additional Information dated March 1, 1998, has been filed with
the Securities and Exchange Commission (the "SEC") and is hereby incorporated
by reference. It is available upon request and without charge by contacting the
Fund at the above address or telephone number.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE
SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is March 1, 1998.
<PAGE>
1. Fund Expenses
Shareholder Transaction Expenses:
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.45%
Maximum Sales Charge Imposed on Reinvested Dividends ......................... None
Maximum Deferred Sales Charge ................................................ None
</TABLE>
<TABLE>
<S> <C>
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees (net of fee waivers) ........................................ 0.27%*
12b-1 Fees .................................................................. 0.25%
Other Expenses (net of fee waivers) ......................................... 0.38%*
Total Fund Operating Expenses (net of fee waivers) .......................... 0.90%*
--------
</TABLE>
- ------------------------
*The Fund's investment advisor and administrator intend, but are not obligated,
to waive their fees proportionately to the extent required so that Total Fund
Operating Expenses do not exceed 0.90% of the Fund's average daily net assets.
Absent fee waivers, Management Fees would be 0.40%, Other Expenses (including
administration fees) would be 0.45% and Total Fund Operating Expenses would be
1.10%, respectively, of the Fund's average daily net assets.
Example:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time
period:* $53 $72 $92 $150
</TABLE>
- ------------------------
*Absent fee waivers, expenses would be higher.
The Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and expenses
that you will bear directly and indirectly when you invest in Shares. If you
purchase Shares through a financial institution, you may be charged separate
fees by the financial institution. The rules of the SEC require that the
maximum sales charge (in the Shares' case, 4.45% of the offering price) be
reflected in the above table. However, you may qualify for reduced sales
charges or no sales charge at all. (See "How to Invest in the Fund -- Offering
Price.") Due to the continuous nature of Rule 12b-1 fees, you may pay more than
the equivalent of the maximum front-end sales charges permitted by the Conduct
Rules of the National Association of Securities Dealers, Inc. if you hold your
Shares for a long time.
2
<PAGE>
2. Financial Highlights
The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by Coopers
& Lybrand L.L.P., the Fund's independent accountants. The financial statements
and financial highlights for the fiscal year ended October 31, 1997 and the
report thereon of Coopers & Lybrand L.L.P. are included in the Statement of
Additional Information. Additional performance information is contained in the
Fund's Annual Report for the fiscal year ended October 31, 1997, which is
available at no cost by calling the Fund at (800) 955-7175.
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period ................................... $ 10.58 $ 10.65 $ 9.81 $ 11.10
------- ------- ------- -------
Income from Investment Operations:
Net investment income ..................... 0.52 0.48 0.48 0.46
Net realized and unrealized gain/(loss)
on investments ........................... 0.24 -- 0.98 ( 1.15)
------- ------- ------- -------
Total from Investment Operations .......... 0.76 0.48 1.46 ( 0.69)
------- ------- ------- -------
Less Distributions:
Distributions from net investment
income and net realized short-term
gains .................................... ( 0.52) ( 0.54) ( 0.54) ( 0.56)
Distributions from net realized mid-
term and long-term gains ................. ( 0.03) ( 0.01) ( 0.08) ( 0.04)
------- ------- ------- -------
Total distributions ....................... ( 0.55) ( 0.55) ( 0.62) ( 0.60)
------- ------- ------- -------
Net asset value at end of period .......... $ 10.79 $ 10.58 $ 10.65 $ 9.81
======= ======= ======= =======
Total Return:(2)............................ 7.43% 4.67% 15.42% ( 6.49)%
Ratios to Average Daily Net Assets:
Expenses(3) ............................... 0.90% 0.90% 0.90% 0.90%
Net investment income(5) .................. 4.46% 4.48% 4.72% 4.37%
Supplemental Data:
Net assets at end of period (000):
ISI Class Shares ......................... $79,003 $84,712 $86,292 $83,607
Flag Investors Class A Shares ............ $38,390 $41,193 $45,980 $49,903
Portfolio turnover rate ................... 26% 32% 55% 37%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31, February 26, 1990(1)
------------------------------------- through
1993 1992 1991 October 31, 1990
----------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period ................................... $ 10.31 $ 10.36 $ 9.99 $ 10.00
------- ------- ------- ---------
Income from Investment Operations:
Net investment income ..................... 0.50 0.50 0.57 0.38
Net realized and unrealized gain/(loss)
on investments ........................... 0.94 0.22 0.49 ( 0.02)
------- ------- ------- ---------
Total from Investment Operations .......... 1.44 0.72 1.06 0.36
------- ------- ------- ---------
Less Distributions:
Distributions from net investment
income and net realized short-term
gains .................................... ( 0.61) ( 0.65) ( 0.69) ( 0.37)
Distributions from net realized mid-
term and long-term gains ................. ( 0.04) ( 0.12) -- --
------- ------- ------- ---------
Total distributions ....................... ( 0.65) ( 0.77) ( 0.69) ( 0.37)
------- ------- ------- ---------
Net asset value at end of period .......... $ 11.10 $ 10.31 $ 10.36 $ 9.99
======= ======= ======= =========
Total Return:(2)............................ 14.36% 6.06% 10.85% 3.78%
Ratios to Average Daily Net Assets:
Expenses(3) ............................... 0.90% 0.90% 0.90% 0.90%(4)
Net investment income(5) .................. 4.38% 4.78% 5.57% 6.12%(4)
Supplemental Data:
Net assets at end of period (000):
ISI Class Shares ......................... $88,378 $51,420 $20,053 $ 17,290
Flag Investors Class A Shares ............ $53,486 $45,536 $38,491 $ 5,698
Portfolio turnover rate ................... 68% 95% 86% 99%
</TABLE>
- -----------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory and administration fees, the ratio of
expenses to average daily net assets would have been 1.10%, 1.13%, 1.10%,
1.11%, 1.14%, 1.27%, 1.47% and 1.92% for the periods ended October 31,
1997, 1996, 1995, 1994, 1993, 1992, 1991 and 1990, respectively.
(4) Annualized.
(5) Without the waiver of advisory and administration fees, the ratio of net
investment income to average daily net assets would have been 4.26%,
4.25%, 4.52%, 4.16%, 4.14%, 4.41%, 4.99% and 5.11% for the periods ended
October 31, 1997, 1996, 1995, 1994, 1993, 1992, 1991 and 1990,
respectively.
3
<PAGE>
3. Investment Program
Investment Objective, Policies and Risk
Considerations
The investment objective of the Fund is a high level of total return, with
relative stability of principal, and secondarily, high current income exempt
from federal income tax through investment in a portfolio consisting primarily
of tax-free municipal obligations ("Municipal Obligations"). Municipal
Obligations include securities of states, territories and possessions of the
United States and the District of Columbia, and their political subdivisions,
agencies and instrumentalities, the interest on which is exempt from federal
income tax in the opinion of bond counsel for the issuer. Under normal market
conditions, the Fund will invest at least 80% of its net assets in Municipal
Obligations. The Fund does not currently intend to acquire Municipal
Obligations that are subject to alternative minimum tax but may so invest up to
20% of its net assets. There can be no assurance that the Fund will achieve its
investment objective.
The Fund will invest at least 75% of its portfolio of Municipal Obligations in
securities rated, on the date of investment, A-1 or higher (in the case of
municipal bonds) and higher than MIG 3 (in the case of municipal notes) by
Moody's Investors Service, Inc. ("Moody's") or rated A+ or higher (in the case
of municipal bonds) and higher than SP-2 (in the case of municipal notes) by
Standard & Poor's Ratings Group ("S&P") or, if unrated, of comparable quality
as determined by the Fund's investment advisor under criteria approved by the
Board of Directors. The Fund may invest up to 25% of its portfolio of Municipal
Obligations in securities rated A (in the case of municipal bonds) or MIG 3 (in
the case of municipal notes) by Moody's or rated A (in the case of municipal
bonds) or SP-2 (in the case of municipal notes) by S&P or, if unrated, of
comparable quality as determined by the investment advisor under criteria
approved by the Board of Directors.
Even under normal circumstances the Fund may invest to a limited extent in
taxable obligations depending on market conditions. These obligations may
include U.S. Government and agency, bank and corporate securities and
repurchase agreements collateralized by such securities. For temporary
defensive purposes, the Fund may invest without limit in short-term obligations
of these types. The Fund may also invest in financial futures, "when-issued"
securities, standby commitments of brokers, dealers or banks and variable and
floating rate demand obligations. These investment practices, which may involve
certain special risks, are described below.
Selection of Investments
The Fund's investment advisor (the "Advisor"--see "Investment Advisor") buys
and sells securities for the Fund's portfolio with a view toward, first, a high
level of total return with relative stability of principal and, second, high
current income that is federally tax exempt. Therefore, in addition to yield,
the potential for capital gains and appreciation resulting from possible
changes in interest rates will be a consideration in selecting investments.
While income distributions to shareholders will generally be tax exempt,
distributions of capital gains will be taxable. Accordingly, to the extent the
Fund achieves its investment objective, a larger portion of its distributions
will be taxable than would be the case if the Fund placed a greater emphasis on
earning tax exempt income. (See "Investment Program--Taxable Investments" and
"Dividends and Taxes--Tax Treatment of Dividends and Distributions.")
The Advisor will be free to take full advantage of the entire range of
maturities offered by Municipal Obligations and may adjust the average maturity
of the Fund's portfolio from time to time, depending on its assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. Thus, at certain times the
average maturity of the portfolio may be relatively short (under five years,
for example) and at other times may be relatively long (in the 20-30 year
range, for example). In determining which direction interest rates are likely
to move, the Advisor relies on the economic analysis made by its chairman,
Edward S. Hyman. There is no assurance that such economic analysis will
accurately predict interest rate trends or that the portfolio strategies based
on Mr. Hyman's economic analysis will be effective.
Special Risk Considerations
As with other debt securities, the value of Municipal Obligations changes as
interest rates fluctuate. Changes in the value of portfolio securities will not
affect interest income
4
<PAGE>
from those securities but will be reflected in the Fund's net asset value.
Thus, a decrease in interest rates will generally result in an increase in the
value of the Shares. Conversely, during periods of rising interest rates, the
value of the Shares will generally decline. The magnitude of these fluctuations
will generally be greater at times when the average maturity of the Fund's
portfolio securities is longer.
Purchase of When-Issued Securities
New issues of Municipal Obligations are usually offered on a when-issued basis,
which means that delivery and payment for such Municipal Obligations normally
take place within 45 days after the date of the commitment to purchase. The
payment obligation and the interest rate that will be received on a when-issued
security are fixed at the time the purchase commitment is entered into,
although no interest on such security accrues to the Fund prior to payment and
delivery. A segregated account of the Fund consisting of cash or other liquid
securities equal at all times to the amount of the when-issued commitments will
be established and maintained by the Fund at the Fund's custodian. While the
Fund will purchase securities on a when-issued basis only with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date to limit the effects of adverse market action. The value of
when-issued securities is subject to market fluctuation. The Fund will
ordinarily invest no more than 40% of its net assets at any time in when-issued
securities.
Acquisition of Stand-By Commitments
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, a broker,
dealer or bank is obligated to repurchase, at the Fund's option, specified
securities in the Fund's portfolio at a specified price. In this respect,
stand-by commitments are comparable to put options and thus the Fund's ability
to enforce such obligations is subject to the risk that the seller of the
commitment may default on its obligations. The Fund will acquire stand-by
commitments as a means of changing the average maturity of its portfolio in
response to expected changes in market interest rates.
The Fund anticipates that stand-by commitments will generally be available from
brokers, dealers and banks without the payment of any direct or indirect
consideration, but the Fund may have to pay for stand-by commitments, thus
increasing the cost of acquiring and holding the underlying security and
similarly decreasing such security's yield. Gains realized in connection with
stand-by commitments will be taxable.
Purchase of Variable and Floating Rate Demand Obligations
The Fund may purchase floating and variable rate demand notes and bonds, which
are tax-exempt obligations normally having stated maturities in excess of one
year, but which permit the holder to demand payment of principal either at any
time or at specified intervals. The interest rates on these obligations
fluctuate from time to time in response to changes in the market interest
rates. Frequently, such obligations are secured by letters of credit or other
credit support arrangements provided by banks. Each demand note and bond
purchased by the Fund will meet the quality criteria established for the
purchase of other Municipal Obligations. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations, although they are
redeemable at face value. The Fund will not invest more than 10% of its net
assets in floating or variable rate demand obligations as to which the Fund
cannot exercise the demand feature on less than seven days' notice if there is
no secondary market available for these obligations.
Investments in Futures Contracts
The Fund may purchase and sell U.S. exchange traded futures contracts on bond
indices ("Futures Contracts"). At the same time a Futures Contract is purchased
or sold, the Fund must allocate cash or securities as a deposit payment
("initial deposit"). The initial deposit varies but may be as low as 5% or less
of the value of the contract. Daily thereafter, the Futures Contract is valued
and the payment of "variation margin" may be required, so each day the Fund
would provide or receive cash that reflects any decline or increase in the
contract's value.
These instruments will be used only to protect against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should
5
<PAGE>
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of the Futures Contract and may realize a loss on the
Futures Contract in excess of any corresponding gain in the hedged portfolio
positions. Futures transactions involve other risks as well. For example, a
lack of correlation between the index and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses on the Futures Contract in excess of
any corresponding gain in the hedged portfolio positions. In addition, there
can be no assurance that a liquid secondary market will exist for any Futures
Contract purchased or sold, and the Fund may be required to maintain a position
until exercise or expiration, which could result in losses on the Futures
Contract in excess of any corresponding gain in the hedged portfolio positions.
Regulations of the Commodity Futures Trading Commission (the "CFTC") permit the
use of futures transactions for bona fide hedging purposes without regard to
the percentage of assets committed to futures margin and options premiums. CFTC
regulations also allow funds to employ futures transactions for other
"non-hedging" purposes to the extent that aggregate initial futures margins and
options premiums do not exceed 5% of total assets. The Fund will not enter into
Futures Contracts if obligations under all Futures Contracts would amount to
more than 30% of its total assets.
Investments in Repurchase Agreements
The Fund may agree to purchase U.S. Treasury Securities from creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. U.S. Treasury Securities are direct obligations of the U.S. Government
and are supported by the full faith and credit of the United States. Default by
or bankruptcy proceedings with respect to the seller may, however, expose the
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying obligations.
Taxable Investments
From time to time, the Fund may invest in securities, the interest on which is
subject to federal income tax. The Fund may make such investments (a) pending
investment of proceeds from sales of Shares or portfolio securities in
tax-exempt securities, (b) pending settlement of purchases of portfolio
securities, (c) to maintain liquidity for meeting anticipated redemptions, or
(d) when in the Advisor's opinion it is advisable because of adverse conditions
affecting the market for Municipal Obligations. The taxable investments in
which the Fund may invest consist of U.S. Treasury Securities and repurchase
agreements fully collateralized by U.S. Treasury Securities (collectively, the
"Taxable Investments"). The Fund may invest up to 20% of its net assets in
Taxable Investments. The Fund may earn taxable income from other sources.
Dividends paid by the Fund that are attributable to interest earned from
Taxable Investments and to taxable income from other investments will be
taxable to you. (See "Dividends and Taxes -- Tax Treatment of Dividends and
Distributions.")
Size of Fund
The Fund currently intends to limit the size of the Fund and to accept share
purchases only from existing shareholders at such time as the assets of the
Fund are in excess of $200 million but less than $250 million, and thereafter
not to accept any share purchases other than dividend reinvestments.
4. Investment Restrictions
The investment restrictions recited below are matters of fundamental policy and
may not be changed without shareholder approval. Accordingly, the Fund will
not:
1) Concentrate 25% or more of its total assets in securities of issuers in any
one industry (for this purpose the U.S. Government or any state or local
government or their agencies and instrumentalities are not considered to
be an industry);
2) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for this purpose, the U.S.
Government or its agencies and instrumentalities are not considered to be
an issuer and, in the case of Municipal Obligations, the public or private
entity ultimately responsible for payment of principal and interest on the
security is considered to be the issuer); or
3) Invest more than 10% of its total assets in illiquid securities, including
repurchase agreements with maturities
6
<PAGE>
of greater than seven days and floating or variable rate demand
obligations as to which the Fund cannot exercise the demand feature on
less than seven days' notice if there is no secondary market available for
these obligations.
The Fund is subject to further investment restrictions that are set forth in
the Statement of Additional Information.
5. How To Invest in the Fund
You may purchase Shares through your securities dealer or through any financial
institution that is authorized to service shareholder accounts ("Shareholder
Servicing Agents"). You may also purchase Shares by completing the Application
Form attached to this Prospectus and returning it, together with payment of the
purchase price to the address shown on the Application Form. As used herein,
the "Fund" refers to Managed Municipal Fund, Inc., whereas references to the
"Shares" shall mean ISI Managed Municipal Fund Shares which is a class of
shares of the Fund.
Your initial investment must be at least $5,000, except that the minimum
initial investment for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent investment must be at least $250, except that the minimum
subsequent investment for participants in the Fund's Automatic Investing Plan
is $100 for monthly investments and $250 for quarterly investments. (See
"Purchases through Automatic Investing Plan" below.) You may purchase Shares on
any day on which the New York Stock Exchange is open for business (a "Business
Day"). Your purchase order will be executed at a per Share purchase price equal
to the net asset value next determined after it is received plus any applicable
front-end sales charge (the "Offering Price"). If your purchase is made by
mail, it must be accompanied by payment of the Offering Price. Purchases made
through your securities dealer or Shareholder Servicing Agent must be in
accordance with their payment procedures.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders.
The net asset value per share is determined daily as of the close of the New
York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing its
share of the Fund's assets, deducting all liabilities attributable to that
class, and dividing the resulting amount by the number of then outstanding
shares of the class. For this purpose, portfolio securities will be given their
market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved by the Fund's Board of
Directors.
Offering Price
Your Share purchase is made at the Offering Price, which includes a sales
charge which is calculated as a percentage of the Offering Price and decreases
as the amount of purchase increases as shown below:
<PAGE>
<TABLE>
<CAPTION>
Sales Sales Dealer
Charge as Charge as Compen-
Percentage Percentage sation as
of of Net Percentage
Offering Amount of Offering
Amount of Purchase Price Invested Price*
- -------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Less than $ 50,000.......... 4.45% 4.66% 4.00%
$50,000 - $ 99,999......... 3.50% 3.63% 3.00%
$100,000 - $ 249,999......... 2.50% 2.56% 2.00%
$250,000 - $ 499,999......... 2.00% 2.04% 1.50%
$500,000 - $ 999,999......... 1.50% 1.52% 1.25%
$1,000,000 - $1,999,999......... 0.75% 0.76% 0.75%
$2,000,000 - $2,999,999......... 0.50% 0.50% 0.50%
$3,000,000 and over............. None None None
</TABLE>
- ------------------------
* The Distributor may make payments of up to 100% of the sales charge to your
securities dealer. Dealers that receive a reallowance of 100% of the sales
charge may be considered underwriters for purposes of the federal
securities laws.
You may obtain reduced sales charges as set forth in the table above by
accumulating purchase orders for, and existing investments in, Shares of this
Fund and any other fund in the ISI family of funds. The applicable sales charge
will be determined based on the total value of your current purchases plus the
value of your existing investments. (For this purpose, existing investments will
be valued at the higher of cost or current value.) You may combine your
purchases and investments with those of your spouse and your children under the
age of 21 for this purpose.
To obtain the reduced sales charge through this right of accumulation, you must
provide your securities dealer or Shareholder Servicing Agent with sufficient
information to verify that you have such a right. The Fund may amend or
terminate this right of accumulation at any time as to subsequent purchases.
7
<PAGE>
You may also obtain the reduced sales charges shown above by executing a
written Letter of Intent that states your intention to invest at least $50,000
within a 13-month period in Shares. Each purchase of Shares under a Letter of
Intent will be made at the Offering Price applicable at the time of such
purchase to the full amount indicated on the Letter of Intent. A Letter of
Intent does not require that you purchase the full amount indicated. The
minimum initial investment under a Letter of Intent is 5% of the full amount.
Shares purchased with the first 5% of the full amount will be held in escrow
(while remaining registered in your name) to secure payment of the higher sales
charge applicable to the Shares actually purchased if you do not purchase the
full amount. Such escrowed Shares will be redeemed to pay the additional sales
charge, if necessary. When the full amount indicated has been purchased, the
escrowed Shares will be released. If you wish to enter into a Letter of Intent
in conjunction with an investment in Shares you may do so by completing the
appropriate section of the Application Form attached to this Prospectus.
You may purchase Shares at net asset value (without sales charge) under the
following circumstances:
1) If you are purchasing Shares in a fiduciary or advisory account with a bank,
bank trust department, registered investment advisory company, financial
planner or securities dealer purchasing Shares on your behalf. To qualify
for this provision, you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee by
your broker or agent if you purchase Shares in this manner.
2) If you are reinvesting some or all of the proceeds of a redemption of Shares
made within the last six months provided that the amount you are
reinvesting is at least $5,000.
3) If you are exchanging an investment in another ISI fund for an investment in
this Fund (see "Purchases by Exchange" for a full description of the
conditions).
4) If you are a current or retired Director of the Fund, a director, employee
or a member of the immediate family of an employee of any of the following
or their respective affiliates: the Advisor, the Fund's administrator, and
any broker-dealer authorized to sell Shares.
Purchases by Exchange
You may exchange shares of any other fund in the ISI family of funds with the
same sales charge structure for an equal dollar amount of Shares without payment
of the sales charges described above or any other charge. In addition, you may
exchange shares of any fund in the ISI family of funds with a lower sales charge
structure, or that were have purchased through a special offer, for an equal
dollar amount of Shares if you have owned the shares you are redeeming for at
least 24 months. If you have owned them for less than 24 months, you may
exchange them for Shares if you pay the difference in sales charges. You may
enter both your redemption and purchase orders on the same Business Day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within six months of the redemption, provided the amount of the
purchase order is at least $5,000.
The net asset value of shares purchased and redeemed in an exchange request
received on a Business Day will be determined on the same day, provided that
the exchange request is received prior to 4:00 p.m. (Eastern Time) or the close
of the New York Stock Exchange, whichever is earlier. Exchange requests
received after 4:00 p.m. (Eastern Time) will be effected on the next Business
Day.
Until February 28, 1999, you may exchange shares of any other mutual fund on
which you have paid a sales charge or shares of any closed-end fund, for an
equal dollar amount of Shares by submitting to the Distributor or to your
securities dealer, the proceeds of the redemption or sale of shares of such
funds, together with evidence of the payment of a sales charge (for mutual
funds only) and the source of such proceeds. Shares issued pursuant to this
offer will not be subject to the sales charges described above or any other
charge.
You may exercise the exchange privilege with respect to other ISI funds by
telephone. (See "Telephone Transactions" below.)
The Fund may modify or terminate these offers of exchange at any time upon 60
days' written notice.
Purchases Through Automatic Investing Plan
You may elect to have a specified amount invested monthly or quarterly in
Shares. The amount specified will be withdrawn from your checking account using
a pre-authorized check and will be invested in Shares at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by
8
<PAGE>
you or the Fund upon 30 days' prior written notice to the other party. If you
wish to enroll in the Automatic Investing Plan or if you wish to obtain
additional information, complete the appropriate section of the Application
Form attached to this Prospectus.
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income dividends and capital gains
distributions will be reinvested in additional Shares at net asset value. You
may elect to receive your distributions in cash or to terminate automatic
reinvestment by completing the appropriate section of the attached Application
Form or by giving written notice to the Fund's transfer agent (the "Transfer
Agent") at the address listed on the inside back cover of this Prospectus,
either directly or through your securities dealer or Shareholder Servicing
Agent, at least five days before the next date on which dividends or
distributions will be paid.
You may also have your distributions invested in shares of other funds in the
ISI family of funds. Call your securities dealer or the Transfer Agent for
additional information.
6. How to Redeem Shares
You may redeem all or part of your investment on any Business Day through your
securities dealer, your Shareholder Servicing Agent or the Transfer Agent. You
may redeem up to $50,000 worth of Shares by telephone. (See "Telephone
Transactions" below.) A redemption order is effected at the net asset value per
share next determined after receipt of your order (or, if stock certificates
have been issued for the Shares to be redeemed, after you tender the stock
certificates for redemption). Redemption orders received after 4:00 p.m.
(Eastern Time) or the close of the New York Stock Exchange, whichever is
earlier, will be effected at the net asset value next determined on the
following Business Day. You will be paid for redeemed Shares by check which
will be mailed within seven days after your redemption order is received in
proper form.
The Transfer Agent, your securities dealer or your Shareholder Servicing Agent
may require the following documents in order to redeem your Shares:
1) A letter of instructions, specifying your account number and the number of
Shares or dollar amount to be redeemed, signed by all owners of the Shares
in the exact names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of your signature by a
member of the Federal Deposit Insurance Corporation, a trust company,
broker, dealer, credit union (if authorized under state law), securities
exchange or association, clearing agency, or savings association;
3) If Shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for Shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of Shares will be paid on the
next dividend payable date. If all of the Shares in your account have been
redeemed on a dividend payable date, the dividend will be remitted to you by
check.
The Fund has the power, under its Articles of Incorporation, to redeem your
account upon 60 days' written notice if its value falls below $500 due to your
redemptions.
7. Telephone Transactions
You may redeem Shares in amounts up to $50,000 or exchange Shares in any
amount, by notifying the Transfer Agent by telephone on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). Telephone
transaction privileges are automatic unless you specifically request that no
telephone redemptions or exchanges be accepted for your account. This election
may be made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value next determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring you to provide certain personal identification information at
the time your account is opened and prior to effecting each transaction
requested by telephone. You may be
9
<PAGE>
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine. Your telephone
transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in effecting telephone transactions. In such event, requests should
be made by mail. Shares held in certificate form may not be exchanged or
redeemed by telephone. (See "How to Invest in the Fund -- Purchases by Exchange"
and "How to Redeem Shares.")
8. Dividends and Taxes
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of its net
investment income in the form of monthly dividends. The Fund may distribute to
shareholders any net capital gains (the excess of net long-term capital gains
over net short-term capital losses) on an annual basis or, alternatively, may
elect to retain such net capital gains and pay tax thereon.
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences affecting the
Fund and its shareholders is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. No attempt
has been made to present a detailed explanation of the federal, state or local
tax treatment of the Fund or the shareholders, and the discussion here is not
intended as a substitute for careful tax planning. Accordingly, you are advised
to consult with your tax advisor regarding any specific questions.
The Statement of Additional Information sets forth further information
concerning taxes.
The Fund has been and expects to continue to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As long as the Fund qualifies for this tax treatment, it will be
relieved of federal income tax on amounts distributed to shareholders. The Fund
also intends to make sufficient distributions prior to the end of each calendar
year to avoid liability for federal excise tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of obligations the interest on which is exempt from federal income
tax.
As long as this and certain other requirements are met, dividends derived from
the Fund's net tax-exempt interest income will be "exempt-interest dividends"
that are excluded from your gross income for federal income tax purposes.
Exempt-interest dividends may, however, have collateral federal income tax
consequences, including alternative minimum tax consequences. Furthermore, the
Fund may not be an appropriate investment for you if you are a "substantial
user" of facilities financed with industrial development bonds or private
activity bonds (or a related party to a "substantial user"). (See the Statement
of Additional Information.)
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities to
satisfy the Code's requirements for the payment of exempt-interest dividends.
You will be taxed on distributions from the Fund out of net investment income
that is not tax-exempt interest and out of net short-term capital gains as
ordinary income, whether such distributions are paid to you in cash or in
additional Shares.
You will be taxed on distributions from the Fund out of net capital gains as
gains from the sale or exchange of a capital asset held for more than one year
whether paid to you in cash or additional Shares, and regardless of how long
you have held the Shares. You will be advised annually as to the federal income
tax status of distributions made during the year.
Ordinarily, you should include all dividends as income in the year of payment.
However, dividends declared payable to shareholders of record in December of
one year, but paid in January of the following year, will be deemed for tax
purposes to have been received by you and paid by the Fund in the year in which
the dividends were declared.
The sale, exchange or redemption of Shares is a taxable event for you.
10
<PAGE>
Interest on indebtedness incurred or continued by shareholders to purchase or
carry Shares will not be deductible for federal income tax purposes.
The Fund may not be a suitable investment for tax-exempt shareholders and plans
because such shareholders and plans would not gain any additional benefit from
the receipt of exempt-interest dividends.
9. Management of the Fund
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributors, administrator, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to its distributors, to the Advisor and to the Fund's
administrator. A majority of the Directors of the Fund have no affiliation with
the Distributor, the Advisor or the Fund's administrator.
The Fund's Directors and officers are as follows:
Edward S. Hyman Chairman
Richard T. Hale Vice Chairman
R. Alan Medaugh Director and President
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Nancy Lazar Vice President
Carrie L. Butler Vice President
Margaret M. Beeler Assistant Vice President
Keith C. Reilly Assistant Vice President
Joseph A. Finelli Treasurer
Amy M. Olmert Secretary
Scott J. Liotta Assistant Secretary
10. Investment Advisor
International Strategy & Investment Inc. ("ISI" or the "Advisor"), a registered
investment advisor, serves as investment advisor to the Fund pursuant to an
investment advisory agreement dated as of April 1, 1991. ISI employs Messrs.
Edward S. Hyman and R. Alan Medaugh. Due to their stock ownership, Messrs. Hyman
and Medaugh may be deemed to be controlling persons of ISI. As of December 31,
1997, the Advisor had approximately $510 million under management representing
both tax-free and taxable accounts. The Advisor also acts as investment advisor
to Total Return U.S. Treasury Fund, Inc., North American Government Bond Fund,
Inc. and ISI Strategy Fund, Inc., open-end management investment companies with
approximately $358 million of aggregate net assets as of December 31, 1997.
As compensation for its services for the fiscal year ended October 31, 1997,
the Advisor received a fee (net of fee waivers) equal to 0.27% of the Fund's
average daily net assets. ISI and the Fund's administrator have voluntarily
agreed to reduce proportionately their respective annual fees if necessary, so
that the Fund's annual expenses do not exceed 0.90% of its average daily net
assets. (See "Fund Expenses.")
Portfolio Managers
Edward S. Hyman, Chairman of ISI and the Fund, and R. Alan Medaugh, President
of ISI and President and a Director of the Fund, have shared direct portfolio
management responsibility for the Fund since its inception. Mr. Hyman is
responsible for developing the economic analysis upon which the Fund's
selection of investments is based. (See "Investment Program.") Before joining
ISI, Mr. Hyman was a vice chairman and member of the Board of C.J. Lawrence
Inc. and prior thereto, an economic consultant at Data Resources. He writes a
variety of international and domestic economic research reports which follow
trends that may determine the direction of interest rates. These international
and domestic reports are sent to ISI's private institutional clients in the
United States and overseas. The periodical Institutional Investor, which rates
analysts and economists on an annual basis, has rated Mr. Hyman as its "first
team" economist, which is its highest rating, in each of the last eighteen
years.
Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam Management
Company and Fidelity Management and Research.
11. Administrator
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust New York Corporation, provides administration services to the Fund.
11
<PAGE>
ICC supervises the day-to-day operations of the Fund, including the preparation
of registration statements, proxy materials, shareholder reports, compliance
with all requirements of securities laws in the states in which the Shares are
distributed and oversight of the relationship between the Fund and its other
service providers. As compensated for these services for the fiscal year ended
October 31, 1997, ICC received a fee (net of fee waivers) equal to 0.14% of the
Fund's average daily net assets. ICC and ISI have voluntarily agreed to reduce
proportionately their respective annual fees if necessary, so that the Fund's
annual expenses do not exceed .90% of its average daily net assets. (See "Fund
Expenses.")
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")
12. Distributor
International Strategy & Investment Group Inc. ("ISI Group" or the
"Distributor") has served as distributor of the Shares since April 1, 1997
pursuant to a Distribution Agreement and related Plan of Distribution (the
"Plan") adopted pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended. ISI Group is a broker-dealer that was formed in 1991 and is
an affiliate of the Advisor. ISI Group employs Mr. Edward S. Hyman and Ms.
Nancy Lazar. Due to their stock ownership, Mr. Hyman and Ms. Lazar may be
deemed to be controlling persons of ISI Group. As compensation for its services
for the period from April 1, 1997 through October 31, 1997, the Distributor
received a fee equal to 0.25% (annualized) of the Shares' average daily net
assets. The Distributor may allocate on a proportional basis up to all of its
fee to selected securities dealers as compensation for their ongoing
shareholder services, including processing redemption and sale requests and
responding to your inquiries.
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks to provide shareholder services,
pursuant to which the Distributor may allocate on a proportional basis up to all
of its distribution fee as compensation for such financial institutions' ongoing
shareholder services. Such financial institutions may charge you separately for
these services.
Payments under the Plan are made as described above regardless of the
Distributor's actual cost of providing distribution services and may be used to
pay the Distributor's overhead expenses. If the cost of providing distribution
services is less than the payments received, the Distributor may retain the
unexpended portion of the distribution fee. The Distributor or its associated
persons will from time to time and from its own resources pay or allow
additional discounts or promotional incentives in the form of cash or other
compensation (including merchandise or travel).
13. Custodian, Transfer Agent and Accounting Services
Investment Company Capital Corp. is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services for the fiscal year ended October 31, 1997, ICC
received from the Fund a fee equal to 0.05% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)
14. Performance Information
From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
relevant indices. All such advertisements will show the average annual total
return, net of the Fund's maximum sales charge, over one-, five- and ten-year
periods or, if such periods have not yet elapsed, shorter periods corresponding
to the life of the Fund. Such total return quotations will be computed by
finding the average annual compounded rates of return over such periods that
would equate an assumed initial investment of $1,000 to the ending redeemable
value, net of the maximum sales charge and other fees, according to the
required standardized calculation. The standardized calculation is required by
the SEC to provide consistency and comparability in investment company
advertising and is not equivalent to a yield calculation.
The Fund may also advertise yield and tax-equivalent yield quotations. Any
yield quotation of the Fund is based on the annualized net investment income
per share of the Fund over a 30-day period. The yield for the Fund is
calculated by dividing the net investment income per share of the Fund earned
during the period by the maximum offering price per share of the Fund on the
last day of that period.
12
<PAGE>
The resulting figure is then annualized. The Fund's yield calculations assume a
maximum sales charge of 4.45% for the Shares. The Fund's taxable-equivalent
yield is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after tax equivalent of
the Fund's yield. In calculating taxable-equivalent yield, the Fund assumes
certain tax brackets for shareholders.
If the Fund compares its performance to other funds or to relevant indices, its
performance will be stated in the same terms in which such comparative data and
indices are stated.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Municipal
Bond Index, the Consumer Price Index, the return on 90-day U.S. Treasury Bills,
long-term U.S. Treasury bonds, bank certificates of deposit, the Standard &
Poor's 500 Stock Index and the Dow Jones Industrial Average. The Fund may also
use total return performance data as reported in the following national
financial and industry publications that monitor the performance of mutual
funds: Money Magazine, Forbes, Business Week, Barron's, Investor's Daily,
IBC/Donoghue's Money Fund Report and The Wall Street Journal. For these
purposes, the performance of the Fund, as well as the performance of such
indices, may not reflect sales charges, the inclusion of which would reduce
performance results.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund. Performance
is generally a function of the type and quality of investments held by the
Fund, operating expenses and market conditions. Any fees charged by your bank
with respect to the account through which your Shares may be purchased,
although not included in calculations of performance, will reduce your
performance results.
15. General Information
Capital Shares
The Fund is an open-end, diversified management investment company organized
under the laws of the State of Maryland on January 5, 1990 and is authorized to
issue 40 million shares of capital stock, with a par value of $.001 per share.
Shares have equal rights with respect to voting. Voting rights are not
cumulative, so the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In the event of liquidation or dissolution of the Fund,
each Share is entitled to its portion of the Fund's assets after all debts and
expenses have been paid. The fiscal year-end of the Fund is October 31.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests in
a separate portfolio of securities, and separate classes of each series of the
Fund. The shares offered by this Prospectus have been designated "ISI Managed
Municipal Fund Shares." The Board has no present intention of establishing any
additional series of the Fund but the Fund does have another class of shares in
addition to the Shares offered hereby, "Flag Investors Managed Municipal Fund
Class A Shares." Shares of that class are sold through broker-dealers.
Different classes of the Fund may be offered to certain investors and holders
of such shares may be entitled to certain exchange privileges not offered to
Shares. All classes of the Fund share a common investment objective, portfolio
and advisory fee, but the classes may have different distribution expenses and
sales charges and, accordingly, performance may differ.
Annual Meetings
Unless required by Maryland law, the Fund does not expect to hold annual
meetings of shareholders but special meetings of shareholders may be held under
certain circumstances. However, shareholders of the Fund retain the right,
under certain circumstances, to request that a meeting of shareholders be held
for the purpose of considering the removal of a Director from office, and if
such a request is made, the Fund will assist with shareholder communications in
connection with the meeting.
Reports
You will be furnished with semi-annual reports containing information about the
Fund and its operations, including a list of investments held in the Fund's
portfolio and financial statements. The annual financial statements are audited
by the Fund's independent accountants, Coopers & Lybrand L.L.P.
13
<PAGE>
Shareholder Inquiries
If you have questions concerning your Shares, you should contact the Transfer
Agent at (800) 882-8585, the Fund at (800) 955-7175, your securities dealer or
Shareholder Servicing Agent.
14
<PAGE>
ISI MANAGED MUNICIPAL FUND SHARES
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "ISI Managed Municipal Fund Shares" and mail with this
Application to:
ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426
For assistance in completing this form, please call the Transfer Agent at (800)
882-8585.
Your Account Registration (Please Print) ______________________________________
Existing Account No., if any
Individual or Joint Tenant
_________________________________________
First Name Initial Last Name
_________________________________________
Social Security Number
_________________________________________
Joint Tenant Initial Last Name
_________________________________________
Social Security Number
Corporations, Trusts, Partnerships, etc.
_________________________________________
Name of Corporation, Trust or Partnership
_________________________________________
Tax ID Number
_________________________________________
Name of Trustees (If to be included in the Registration)
Gifts to Minors
_________________________________________
Custodian's Name (only one allowed by law)
_________________________________________
Minor's Name (only one)
_________________________________________
Social Security Number of Minor
under the ____________ Uniform Gifts to Minors Act
State of Residence
Mailing Address
_________________________________________
Street
_________________________________________
City State Zip
(____)___________________________________
Daytime Phone
Statement of Intention (Optional)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares of
ISI Managed Municipal Fund Shares in an aggregate amount at least equal to:
___ $50,000 ___ $100,000 ___ $250,000 ___ $500,000
___ $1,000,000 ___ $2,000,000 ___ $3,000,000
Right of Accumulation (Optional)
List the Account numbers of other ISI Funds that you or your immediate family
already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Distribution Options
Please check appropriate boxes. There is no sales charge for reinvested
dividends. If none of the options are selected, all distributions will be
reinvested.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
<PAGE>
Automatic Investing Plan (Optional)
[ ] I authorize you as Agent for the Automatic Investing Plan to automatically
invest $ _____________ for me, on a monthly or quarterly basis, on or about the
20th of each month or if quarterly, the 20th of January, April, July and
October, and to draw a bank draft in payment of the investment against my
checking account. (Bank drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250
Subsequent Investments (check one): [ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
Please attach a voided check.
_____________________________________ ______________________________________
Bank Name Depositor's Signature Date
_____________________________________ ______________________________________
Existing ISI Managed Municipal Fund Depositor's Signature Date
Account No., if any (if joint acct., both must sign)
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect to
other ISI Funds) unless I mark one or both of the boxes below.
No, I/We do not want: [ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank: __________________________ Bank Account No.: ________________________
Address: __________________________ Bank Account Name: ________________________
__________________________
Signature and Taxpayer Certification
- --------------------------------------------------------------------------------
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding
is not an additional tax, and any amounts withheld may be credited against
your ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as
required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above, I
have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer
Agent within 60 days of the date of this Application or if I fail to
furnish my correct Social Security Number or Tax ID Number, I may be
subject to a penalty and a 31% backup withholding on distributions and
redemption proceeds. (Please provide either number on IRS Form W-9.
You may request such form by calling the Transfer Agent at
800-882-8585.)
<PAGE>
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes: _________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or resident
and I am an exempt foreign person as defined by the Internal Revenue Service.
- --------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus. I acknowledge that the
telephone redemption and exchange privileges are automatic and will be effected
as described in the Fund's current prospectus (see "Telephone Transactions"). I
also acknowledge that I may bear the risk of loss in the event of fraudulent
use of such privileges. If I do not want telephone redemption or exchange
privileges, I have so indicated on this Application.
- --------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
__________________________________ __________________________________________
Signature Date Signature (if a joint account, Date
both must sign)
- --------------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name: _____________________ Dealer Code: ________________________
Dealer's Address: _____________________ Branch Code: ________________________
_____________________
Representative: _____________________ Rep. No.: ________________________
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
ISI MANAGED MUNICIPAL FUND SHARES
(A Class of Managed Municipal Fund, Inc.)
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022
1-800-955-7175
Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. INTERNATIONAL STRATEGY &
One South Street INVESTMENT GROUP INC.
Baltimore, Maryland 21202 717 Fifth Avenue
New York, New York 10022
Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19013
1-800-882-8585
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
<PAGE>
ISI
MANAGED
MUNICIPAL FUND
SHARES
(A Class of Managed
Municipal Fund, Inc.)
TABLE OF CONTENTS
Page
----
1. Fund Expenses ..................................................... 2
2. Financial Highlights .............................................. 3
3. Investment Program ................................................ 4
4. Investment Restrictions ........................................... 6
5. How to Invest in the Fund ......................................... 7
6. How to Redeem Shares .............................................. 9
7. Telephone Transactions ............................................ 9
8. Dividends and Taxes ............................................... 10
9. Management of the Fund ............................................ 11
10. Investment Advisor ................................................ 11
11. Administrator ..................................................... 11
12. Distributor ....................................................... 12
13. Custodian, Transfer Agent and Accounting Services ................ 12
14. Performance Information ........................................... 12
15. General Information ............................................... 13
ISI
INTERNATIONAL STRATEGY & INVESTMENT
ISI
MANAGED
MUNICIPAL FUND
SHARES
(A Class of Managed
Municipal Fund, Inc.)
A mutual fund with the investment objective of a high level of total
return with relative stability of principal and secondarily, high current
income exempt from federal income tax through investment in a portfolio
consisting primarily of tax-free municipal obligations.
March 1, 1998
PROSPECTUS
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STATEMENT OF ADDITIONAL INFORMATION
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MANAGED MUNICIPAL FUND, INC.
One South Street
Baltimore, Maryland 21202
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS, WHICH MAY
BE OBTAINED FROM YOUR PARTICIPATING DEALER OR SHAREHOLDER
SERVICING AGENT OR BY CALLING THE FUND AT (800) 767-FLAG (FOR
THE FLAG INVESTORS CLASS A SHARES CLASS) OR (800) 955-7175
(FOR THE ISI SHARES).
Statement of Additional Information Dated: March 1, 1998
Relating to Prospectuses
of
Flag Investors Managed Municipal Fund Class A Shares Dated: March 1, 1998
and
ISI Managed Municipal Fund Shares Dated: March 1, 1998
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TABLE OF CONTENTS
Page
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1. General Information and History ..................................1
2. Investment Objective and Policies ................................1
3. Valuation of Shares and Redemption................................6
4. Federal Tax Treatment of Dividends
and Distributions.................................................7
5. Management of the Fund...........................................11
6. Investment Advisory and Other Services...........................15
7. Administration...................................................16
8. Distribution of Fund Shares .................................... 17
9. Portfolio Transactions...........................................21
10. Capital Stock ...................................................22
11. Semi-Annual Reports..............................................23
12. Custodian, Transfer Agent and Accounting Services .............. 23
13. Independent Accountants .........................................24
14. Performance Information .........................................24
15. Control Persons and Principal Holders of
Securities .....................................................26
16. Financial Statements .........................................26
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1. GENERAL INFORMATION AND HISTORY
Managed Municipal Fund, Inc. (the "Fund") is an open-end management
investment company. Under the rules and regulations of the Securities and
Exchange Commission (the "SEC"), all mutual funds are required to furnish
prospective investors with certain information concerning the activities of the
company being considered for investment. The Fund currently offers two classes
of shares: Flag Investors Managed Municipal Fund Class A Shares, (the "Flag
Investors Class A Shares") and ISI Managed Municipal Fund Shares (the "ISI
Shares"). There are two separate prospectuses for the Fund's shares: one for the
Flag Investors Class A Shares and one for the ISI Shares. Each prospectus
contains important information concerning the classes of shares offered thereby
and the Fund, and may be obtained without charge from the Fund by calling at
(800) 767-FLAG)(for a Prospectus for the Flag Investors Class A Shares) or (800)
955-7175) (for a prospectus for the ISI Shares), or from Participating Dealers
which offer shares of the respective classes of the Fund ("Shares") to
prospective investors. As used herein the term "Prospectus" describes
information common to the prospectuses of the two classes of the Fund's shares.
Prospectuses may also be obtained from Shareholder Servicing Agents. Otherwise
the term "Prospectus" will be modified by the appropriate class designation. As
used herein, the "Fund" refers to Managed Municipal Fund, Inc. and specific
references to any class of the Fund's shares will be made by using the name of
such class. Prospectuses may also be obtained from Shareholder Servicing Agents.
Some of the information required to be in this Statement of Additional
Information is also included in the Fund's current Prospectuses. To avoid
unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Registration Statement respecting the Fund and its Shares filed
with the SEC. Copies of the Registration Statement as filed, including such
omitted items, may be obtained from the SEC by paying the charges prescribed
under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
January 5, 1990. The Fund filed a registration statement with the SEC
registering itself as an open-end diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933, and commenced operations
on February 26, 1990. The Fund has offered the Flag Investors Class A Shares
since October 23, 1990.
For the period from November 9, 1992 through February 27, 1994, the
Fund offered another class of shares: Flag Investors Managed Municipal Fund
Class B Shares. Shares of that class were renamed the Flag Investors Managed
Municipal Fund Class D Shares and are no longer being offered.
Under a License Agreement dated October 23, 1990, between the Fund and
Alex. Brown Incorporated (now BT Alex. Brown Incorporated), BT Alex. Brown
Incorporated licenses to the Fund the "Flag Investors" name and logo, but
retains rights to that name and logo, including the right to permit other
investment companies to use them.
2. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is a high level of total return with
relative stability of principal, and secondarily, a high level of current income
exempt from federal income tax through investing in a portfolio consisting
primarily of municipal obligations ("Municipal Obligations"). There can be no
assurance that the Fund will achieve its investment objective.
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Municipal Obligations include debt securities issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest on which is exempt from federal income tax. For a discussion of
quality, maturity and other criteria the Fund applies in investing in Municipal
Obligations, see "Investment Objective and Policies" in the Prospectus.
Municipal Obligations can be classified into three principal
categories: "general obligation bonds", "revenue bonds" and "notes". General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power of the issuer.
Revenue bonds include, in most cases, "tax exempt industrial development bonds",
i.e., bonds issued by or on behalf of public authorities to obtain funds for
privately-operated facilities. Tax-exempt industrial development bonds do not
generally carry the pledge of the credit of the issuing municipality, but are
generally guaranteed by the corporate entity on whose behalf they are issued.
Notes are short-term instruments used to provide for short-term capital needs.
They are obligations of the issuing municipalities or agencies and are sold in
anticipation of a bond sale, collection of taxes or receipt of other revenues.
At least 75% of the Fund's portfolio of Municipal Obligations will be
invested in securities rated, at the time of purchase, higher than A by Moody's
or S&P or municipal notes rated at the time of purchase, MIG-1 or MIG-2 by
Moody's or SP-1 by S&P. The ratings of Moody's for tax-exempt bonds in which the
Fund may invest are Aaa, Aa1, Aa, and A1. Bonds rated Aaa are judged by Moody's
to be of the "best quality". The rating of Aa is assigned by Moody's to bonds
which are of "high quality by all standards" but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa rated bonds. The Aaa and Aa rated bonds comprise what are generally known as
"high grade bonds". Bonds rated A by Moody's possess many favorable investment
attributes and are considered as upper- medium-grade obligations. The numerical
modifier 1, in the generic rating classifications of A and Aa indicates that the
obligation ranks in the higher end of its generic rating category. The ratings
of S&P for tax-exempt bonds in which the Fund may invest are AAA, AA+, AA, AA-,
and A+. Bonds rated AAA bear the highest rating assigned by S&P to a debt
obligation. Such rating is intended to indicate an extremely strong capacity to
repay principal and pay interest. Bonds rated AA by S&P are also intended to
qualify as high-quality debt obligations. Such rating is intended to indicate a
very strong capacity to repay principal and pay interest, and in the majority of
instances bonds with such rating differ from AAA issues to a small degree. Bonds
rated A by S&P have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the higher rated categories.
The addition of a plus or minus sign to the A or AA categories shows relative
standing within these rating categories. The two highest rating categories by
Moody's for tax-exempt notes are MIG 1 and MIG 2. Notes bearing the designation
MIG 1 are judged by Moody's to be of the best quality, enjoying strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancings. Notes bearing the designation
MIG 2 are judged by Moody's to be of high quality, with margins of protection
ample although not so large as in the preceding group. The highest S&P rating
for municipal notes issued on or after July 29, 1984 is "SP-1". Prior to July
29, 1984, municipal notes carried the same symbols as municipal bonds. The
designation "SP-1" is intended to indicate a very strong capacity to pay
principal and interest. A "+" is added for those issues determined by S&P to
possess very strong characteristics. Only municipal note issues with a rating by
S&P of SP-1 or higher will qualify for the 75% requirement.
The Fund may invest up to 25% of its portfolio of Municipal Obligations
in municipal bonds rated A by Moody's or S&P or in municipal notes bearing the
designation MIG 3 by Moody's or SP-2
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by S&P. Notes bearing the MIG 3 are judged by Moody's to be of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
S&P grants a rating of SP-2 to a note when it believes the issuer has a
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
The ratings of Moody's and S&P represent each service's opinion as to
the quality of the municipal bonds or notes rated. It should be emphasized that
ratings are general and are not absolute standards of quality or guarantees as
to the creditworthiness of an issuer. Subsequent to its purchase by the Fund, an
issue of municipal bonds or notes may cease to be rated, or its ratings may be
reduced. Neither event requires the elimination of that obligation from the
Fund's portfolio, but will be a factor in determining whether the Fund should
continue to hold that issue in its portfolio.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. See "Federal Tax Treatment of Dividends and
Distributions" for the effect of current federal tax law on this exemption.
"When-Issued" Securities: The Fund may purchase securities on a
"when-issued" basis. When the Fund commits to purchase a security on a
"when-issued" basis, it will set up procedures consistent with the General
Statement of Policy of the SEC concerning such purchases. Since that policy
currently recommends that an amount of the Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
the Fund will always have cash, cash equivalents or U.S. Government securities
or other high quality debt securities sufficient to cover any commitments or to
limit any potential risk. However, although the Fund does not intend to make
such purchases for speculative purposes and intends to adhere to the provisions
of the SEC policy, purchases of securities on such basis may involve more risks
than other types of purchases. For example, the Fund may have to sell assets
which have been set aside in order to meet redemptions. Also, if the Fund
determines it is necessary to sell the "when-issued" securities before delivery,
the Fund may incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made and any gain would not be
tax-exempt. At the time the Fund makes the commitment to purchase or sell
securities on a "when-issued" basis, it will record the transaction and
thereafter reflect the value of such security purchased in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price.
Futures Contracts: The Fund may enter into futures contracts based on
municipal bond indices ("Futures Contracts"). Each such Futures Contract
provides for a cash payment, equal to the amount, if any, by which the value of
the index at maturity is above or below the value of the index at the time the
contract was entered into, times a fixed index "multiplier". The index
underlying such a Futures Contract is generally a broad based index of
securities designed to reflect movements in the relevant market as a whole. The
index assigns weighted values to the securities included in the index, and its
composition is changed periodically. Futures Contracts have been designed by
exchanges which have been designated as "contract markets" by the Commodity
Futures Trading Commission (the "CFTC"), and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. The exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
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At the same time a Futures Contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). The
initial deposit varies but may be as low as 5% or less of the value of the
contract. Daily thereafter, the Futures Contract is valued and the payment of
"variation margin" may be required since each day the Fund would provide or
receive cash that reflects any decline or increase in the contract's value.
Although Futures Contracts call for the making or acceptance of a cash
settlement at a specified future time, the contractual obligation is usually
fulfilled before such date by buying or selling, as the case may be, on a
commodities exchange, an identical Futures Contract calling for settlement in
the same month, subject to the availability of a liquid secondary market. The
Fund incurs brokerage fees when it purchases and sells Futures Contracts. The
purpose of the acquisition or sale of a Futures Contract, in the case of a
portfolio such as that of the Fund which holds or intends to acquire long-term
fixed income securities, is to attempt to protect the Fund from fluctuations in
interest rates without actually buying or selling long-term fixed income
securities. For example, if the Fund owns long-term bonds and interest rates
were expected to increase, the Fund might sell index Futures Contracts. Such a
sale would have much the same effect as selling an equivalent value of the
long-term bonds owned by the Fund. If interest rates did increase, the value of
the debt securities in the portfolio would decline but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, the use of Futures Contracts as an investment technique
allows the Fund to maintain a hedging position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of liquid
assets from its portfolio in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
Futures Contracts.
Although the Fund will invest in Futures Contracts for hedging
purposes, Futures Contracts entail risks. Although the Fund believes that use of
such contracts will benefit the Fund, if the investment judgment of the Fund's
investment advisor (the "Advisor") about the general direction of interest rates
is incorrect, the Fund's overall performance would be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of bonds held in its portfolio and interest rates decrease instead, the
Fund will lose part or all of the benefit of the increased value of its bonds
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell bonds from its portfolio to meet daily variation margin
requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
Various additional risks exist with respect to the trading of futures.
For example, the Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in such instruments will depend on the degree to
which price movements in the underlying index correlate with price
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movements in the relevant portion of the Fund's portfolio. The trading of
futures entails the additional risk of imperfect correlation between movements
in the futures price and the price of the underlying index. The Fund's ability
to engage in futures strategies will also depend on the availability of liquid
markets in such instruments. Transactions in these instruments are also subject
to the risk of brokerage firm or clearing house insolvencies. The liquidity of a
secondary market in a Futures Contract may be adversely affected by "daily price
fluctuation limits", established by exchanges, which limit the amount of
fluctuation in the price of a contract during a single trading day and prohibit
trading beyond such limit. In addition, the exchanges on which futures are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). In addition, the ordinary spreads between prices in the cash and
futures markets, due to differences in the natures of those markets, are subject
to distortions. First, all participants in the futures market are subject to
initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close out Futures
Contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, from the point of
view of speculators, the margin deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate trends by the Advisor may still not result in a successful
transaction.
Repurchase Agreements: The Fund may agree to purchase securities issued
by the United States Treasury ("U.S. Treasury Securities") from creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Such repurchase agreements will be fully collateralized and the Fund will
enter into such agreements only with banks and broker-dealers which are judged
creditworthy by the Fund's Board of Directors under criteria established with
the assistance of the Advisor. The collateral for these repurchase agreements
will be held by the Fund's custodian or by a duly appointed sub-custodian. The
list of approved banks and broker-dealers will be monitored regularly by the
Advisor and reviewed at least quarterly by the Fund's Board of Directors. The
seller under a repurchase agreement may be required to maintain the value of the
securities subject to the repurchase agreement at not less than the repurchase
price. Default by the seller would, however, expose the Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, the Fund may be delayed or limited
in its ability to sell the collateral.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal
limitations. The investment restrictions recited below are in addition to those
described in the Fund's Prospectus, and are matters of fundamental policy and
may not be changed without the affirmative vote of a majority of the outstanding
Shares.
Accordingly, the Fund will not:
1. Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only from banks and in an amount not exceeding 10%
of the value of the total assets of the Fund at the time of such borrowing,
provided that, while borrowings by the Fund equaling 5% or more of the Fund's
total assets are outstanding, the Fund will not purchase securities;
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2. Invest in real estate or mortgages on real estate, provided that
the Fund may purchase securities secured or otherwise supported by interests in
real estate;
3. Purchase or sell commodities or commodities contracts, provided
that for purposes of this restriction financial futures contracts are not
considered commodities or commodities contracts.
4. Act as an underwriter of securities within the meaning of the U.S.
federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
5. Issue senior securities, provided that investments in financial
futures contracts and when-issued securities shall not be deemed to involve
issuance of a senior security;
6. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies;
7. Effect short sales of securities;
8. Purchase securities on margin except that the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions;
9. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs or leases; or
10 Invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days.
The following investment restriction may be changed by a vote of a
majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other investment company registered under
the Investment Company Act, except as permitted by federal law.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) each
day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value per share of a class is calculated by valuing its share
of the Fund's assets, deducting all liabilities attributable to that class, and
dividing the resulting amount by the number of then outstanding shares of the
class. For this purpose, portfolio securities will be given their market value
where feasible. Debt securities (other than short-term obligations), including
listed issues, are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied
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valuations and electronic data processing techniques which take into account
appropriate factors such as institution-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon exchange
or over-the-counter prices, because such valuations are believed to reflect more
accurately the fair value of such securities. Use of the pricing service has
been approved by the Board of Directors. Short-term obligations (i.e., those
with maturities of 60 days or less) are valued at amortized cost, which
constitutes fair value as determined by the Board of Directors. Futures
Contracts will normally be valued at the settlement price on the exchange on
which they are primarily traded. Portfolio securities for which there are no
such valuations are valued at fair value as determined in good faith by or at
the direction of the Board of Directors.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is deemed to
have been received by the Fund and, accordingly, may receive the net asset value
computed at the close of business that day. These "late day" agreements are
intended to permit shareholders placing orders with third parties to place
orders up to the same time as other shareholders.
Redemption
Under normal circumstances, the Fund will redeem Shares by check as
described in the Prospectus. However, if the Board of Directors determines that
it would be in the best interests of the remaining shareholders to make payment
of the redemption price in whole or in part by a distribution in kind of
securities from the portfolio of the Fund in lieu of cash, in conformity with
applicable rules of the SEC, the Fund will make such distributions in kind. If
Shares are redeemed in kind, the redeeming shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation of Shares" and such valuation will be
made as of the same time the redemption price is determined. The Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Fund is obligated to redeem Shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
The following discussion of federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as
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administrative changes or court decisions, may significantly change the
conclusions expressed herein, and may have a retroactive effect with respect to
the transactions contemplated herein.
Qualification as a Regulated Investment Company
The Fund intends to be taxed as a regulated investment company (a
"RIC") under Subchapter M of the Code. In order to qualify as a RIC for any
taxable year, the Fund must derive at least 90% of its gross income from
dividends, interest, gains from the sale or other disposition of stocks or
securities, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its business in investing
in such stocks or securities (the "Income Requirement").
In addition, at the close of each quarter of the Fund's taxable year,
at least 50% of the value of its assets must consist of cash and cash items,
U.S. government securities, securities of other RICs, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of its
total assets in securities of any one issuer and as to which the Fund does not
hold more than 10% of the outstanding voting securities of any one issuer). In
addition, at the close of each quarter of the Fund's taxable year, no more than
25% of the value of its total assets may be invested in the securities (other
than U.S. government securities and securities of other RICs), of any one issuer
or of two or more issuers which the Fund controls and which are engaged in the
same or similar trades or businesses or related trades or businesses (the "Asset
Diversification Test"). The Fund will not lose its status as a RIC if it fails
to meet the Asset Diversification Test solely as a result of a fluctuation in
value of portfolio assets not attributable to a purchase.
Under Subchapter M, the Fund is exempt from federal income tax on its
net investment income and net capital gains (the excess of net long-term capital
gains over net short-term capital losses) which it distributes to shareholders,
provided that it distributes each year at least 90% of its investment company
taxable income (net investment income and the excess of net short-term capital
gains over net long-term capital losses) and 90% of its net tax-exempt interest
income (the "Distribution Requirement"), and complies with certain other
requirements of the Code. The Distribution Requirement for any year may be
waived if the Fund establishes to the satisfaction of the Internal Revenue
Service that it is unable to satisfy the Distribution Requirement by reason of
distributions previously made for the purpose of avoiding liability for federal
excise tax (discussed below).
The Fund will be subject to federal income taxation to the extent any
income or gains are not distributed.
Fund Distributions
Distributions of investment company taxable income will generally be
taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in Shares. Fund distributions
will not be eligible for the corporate dividends received deduction.
As noted in the Prospectus, exempt-interest dividends are excludable
from a shareholder's gross income for regular federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the alternative minimum
tax imposed by Section 55 of the Code (the "Alternative Minimum Tax") or the
environmental tax imposed by Section 59A of the Code (the "Environmental Tax").
The Alternative Minimum Tax is imposed at a rate of up to 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Environmental Tax is imposed at the rate of 0.12% and applies
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only to corporate taxpayers. The Alternative Minimum Tax and the Environmental
Tax may be affected by the receipt of exempt-interest dividends in two
circumstances. First, exempt-interest dividends derived from certain "private
activity bonds" issued after August 7, 1986, will generally be an item of tax
preference and therefore potentially subject to the Alternative Minimum Tax and
the Environmental Tax. The Fund intends, when possible, to avoid investing in
private activity bonds. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alterna tive minimum taxable income for purposes
of determining the Alternative Minimum Tax and the Environmental Tax.
The percentage of income that constitutes "exempt-interest dividends"
will be determined for each year for the Fund and will be applied uniformly to
all dividends declared with respect to the Fund during that year. This
percentage may differ from the actual percentage for any particular day.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders as gain from the sale of a capital asset held for more
than twelve months regardless of the length of time the shareholder has held
Fund Shares. Conversely, if the Fund elects to retain its net capital gains, it
will be taxed thereon at the applicable corporate tax rate. In this event, it is
expected that the Fund also will elect to have shareholders treated as having
received a distribution of such gains, with the result that they will be
required to report such gains on their returns as long-term capital gains, will
receive a refundable tax credit for their allocable share of federal income tax
paid by the Fund on the gains, and will increase the tax basis for their Shares
by an amount equal to 65% of the deemed distribution.
Generally, gain or loss on the sale, exchange or redemption of Shares
will be capital gain or loss which will be long-term if the Shares have been
held for more than eighteen months, mid-term if the Shares have been held for
more than twelve, but not more than eighteen months, and otherwise will be
short-term. However, if a shareholder recognizes a loss on the sale, exchange or
redemption of Shares held for six months or less, such loss will be treated as a
capital loss to the extent that any capital gains distributions have been paid
with respect to such Shares (or any undistributed net capital gains of the Fund
with respect to such Shares is included in determining the shareholder's
long-term capital gains). Similarly, any loss recognized by a shareholder with
respect to Shares held for six months or less will be disallowed to the extent
of any exempt-interest dividends received by the shareholder with respect to
such Shares. In addition, any loss recognized on a sale or other disposition of
Shares will be disallowed to the extent an investor repurchases (or enters into
a contract or option to repurchase) Shares within a period of 61 days (beginning
30 days before and ending 30 days after the disposition of the Shares). This
loss disallowance rule will apply to Shares received through the reinvestment of
dividends during the 61-day period.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend or distribution received, even though the net
asset value per Share on the date of such purchase may have reflected the amount
of such forthcoming dividend or distribution.
- 9 -
<PAGE>
If for any taxable year the Fund does not qualify as a RIC, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. In this event, such distributions
will generally be eligible for the dividends received deduction in the case of
corporate shareholders.
The Fund generally will be required in certain cases to withhold and
remit to the United States Treasury 31% of distributions payable to any
shareholder (1) who has provided either an incorrect tax identification number
or no number at all, (2) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the Fund that such shareholder is
not subject to backup withholding.
The Fund will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year.
Federal Excise Tax; Miscellaneous Considerations
The Code imposes a nondeductible 4% federal excise tax on RICs that do
not distribute in each calendar year an amount equal to 98% of their ordinary
income for the calendar year plus 98% of their capital gains net income for the
one-year period ending on October 31 of such calendar year. The excise tax is
imposed on the undistributed part of this required distribution. In addition,
the balance of such income must be distributed during the next calendar year to
avoid liability for the excise tax in that year. For the foregoing purposes, a
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year. For this purpose,
in determining its capital gain net income for the one-year period ending on
October 31 of such calendar year, the Fund must reduce its capital gain net
income by the amount of any net ordinary loss for the calendar year (but not
below the net capital gains for the one-year period ending on October 31).
Because the Fund intends to distribute all of its income currently (or to retain
at most its "net capital gains" and pay tax thereon), the Fund does not
anticipate incurring any liability for this excise tax. However, investors
should note that the Fund may in certain circumstances be required to liquidate
portfolio investments in order to make sufficient distributions to avoid excise
tax liability.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry Shares of the Fund will not be deductible for federal income
tax purposes. The deduction otherwise allowable to property and casualty
insurance companies for "losses incurred" will be reduced by an amount equal to
a portion of exempt-interest dividends received or accrued during any taxable
year. Foreign corporations engaged in a trade or business in the United States
will be subject to a "branch profits tax" on their "dividend equivalent amount"
for the taxable year, which will include exempt-interest dividends. Certain
Subchapter S corporations may also be subject to taxes on their "passive
investment income," which could include exempt-interest dividends. Up to 85% of
the Social Security benefits or railroad retirement benefits received by an
individual during any taxable year will be included in the gross income of such
individual if the individual's "modified adjusted gross income" (which includes
exempt-interest dividends) plus one-half of the Social Security benefits or
railroad retirement benefits received by such individual during that taxable
year exceeds the base amount described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
Shares. "Substantial user" is defined generally as including a "non-exempt
person" who regularly uses in trade or business a part of such a facility.
- 10 -
<PAGE>
Issuers of bonds purchased by the Fund (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with the
issuance of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Investors should be aware
that exempt-interest dividends derived from such bonds may become subject to
federal income taxation retroactively to the date thereof if such
representations are determined to have been inaccurate or if the issuer of such
bonds (or the beneficiary of such bonds) fails to comply with such covenants.
Rules of state and local taxation of distributions from regulated
investment companies often differ from the rules for federal income taxation
described above. Shareholders of the Fund should consult with their tax advisors
regarding the application of the rules set forth above to their particular
circumstances and also regarding the application of state and local tax laws to
an investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their respective
dates of birth and their principal occupations during the last five years are
set forth below. Unless otherwise indicated, the address of each Director and
executive officer is 717 Fifth Avenue, New York, New York 10022.
*EDWARD S. HYMAN, Chairman and Director (4/8/45) Chairman, International
Strategy & Investment Inc. (registered investment advisor), Chairman,
ISI Inc. (investments) and Chairman and President, International
Strategy & Investment Group Inc. (registered investment advisor and
registered broker-dealer).
*R. ALAN MEDAUGH, Director and President (8/20/43) President, International
Strategy & Investment Inc. (registered investment advisor).
*RICHARD T. HALE, Vice Chairman and Director (7/17/45) BT Alex. Brown
Incorporated, One South Street, Baltimore, MD 21202. Managing Director,
BT Alex. Brown Incorporated; Director and President, Investment Company
Capital Corp. (registered investment advisor) and Chartered Financial
Analyst.
JAMES J.CUNNANE, Director (3/11/38) CBC Capital, 264 Carlyle Lake Drive, St.
Louis, Missouri 63141. Managing Director, CBC Capital (merchant
banking), 1993-Present; Formerly, Senior Vice President and Chief
Financial Officer, General Dynamics Corporation (defense), 1989-1993 and
Director, The Arch Fund (registered investment company).
JOHN F. KROEGER, Director (8/11/24) 37 Pippins Way, Morristown, New Jersey
07960. Director/Trustee, AIM Funds (registered investment companies);
Formerly, Consultant, Wendell & Stockel Associates, Inc. (consulting
firm) and General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32) 26 Farmstead Road, Short Hills, New Jersey
07078. Director, Kimberly-Clark Corporation (personal consumer products)
and Household International (finance and banking); Chairman of the
Quality Control Inquiry Committee, American Institute of Certified
Public Accountants; Formerly, Trustee, Merrill Lynch Funds for
Institutions, 1991-1993; Adjunct
- 11 -
<PAGE>
Professor, Columbia University-Graduate School of Business, 1991-1992;
and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32) Duke Management Company, Erwin Square,
Suite 1000, 2200 West Main Street, Durham, North Carolina 27705.
President, Duke Management Company (investments); Executive Vice
President, Duke University (education, research and healthcare);
Director, Central Carolina Bank & Trust (banking), Key Funds (registered
investment companies) and DP Mann Holdings (insurance); Formerly,
Director, AMBAC Treasurers Trust (registered investment company).
NANCY LAZAR, Vice President (8/1/57) Executive Vice President and Secretary,
International Strategy and Investment Inc. (registered investment
advisor).
CARRIE L. BUTLER, Vice President (5/1/67) Assistant Vice President,
International Strategy and Investment Inc. (registered investment
advisor).
MARGARET M. BEELER, Assistant Vice President (3/1/67) Assistant Vice President,
International Strategy & Investment Inc., May 1996- Present. Formerly,
Marketing Representative, U.S. Healthcare, Inc., 1995-1996; Sales
Manager, Donna Maione, Inc., 1994-1995; Sales Manager, Deborah Wiley
California, 1989-1994.
KEITH C. REILLY, Assistant Vice President (6/22/66) Assistant Vice President,
International Strategy & Investment Inc., May 1996-Present. Formerly,
Select Private Banking Officer, Assistant Manager, Chemical Bank,
1995-1996; Financial Consultant, Dreyfus Corporation, 1989-1995.
JOSEPH A. FINELLI, Treasurer (1/24/57) BT Alex. Brown Incorporated, One South
Street, Baltimore, MD 21202. Vice President, BT Alex. Brown Incorporated
and Vice President, Investment Company Capital Corp. (registered
investment advisor), September 1995-Present; Formerly, Vice President
and Treasurer, The Delaware Group of Funds (registered investment
companies) and Vice President, Delaware Management Company Inc.
(investments), 1980-August 1995.
AMY M. OLMERT, Secretary (5/14/63) BT Alex. Brown Incorporated, One South
Street, Baltimore, MD 21202. Vice President, BT Alex. Brown
Incorporated, June 1997-Present. Formerly, Senior Manager, Coopers &
Lybrand L.L.P., September 1988 - June 1997.
SCOTT J. LIOTTA, Assistant Secretary (3/18/65) BT Alex. Brown Incorporated,
One South Street, Baltimore, MD 21202. Assistant Vice President, BT
Alex. Brown Incorporated, July 1996-Present; Formerly, Manager and
Foreign Markets Specialist, Putnam Investments Inc. (registered
investment companies), April 1994-July 1996; Supervisor, Brown Brothers
Harriman & Co. (domestic and global custody), August 1991-April 1994.
- ---------------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
Directors and officers of the Fund are also directors or officers of
some or all of the other investment companies advised, administered or managed
by BT Alex. Brown Incorporated ("BT
- 12 -
<PAGE>
Alex. Brown") or any of its affiliates. There are currently 13 funds in the Flag
Investors/ISI Funds and BT Alex. Brown Cash Reserve Fund, Inc. fund complex (the
"Fund Complex"). Mr. Hyman serves as a Chairman of four funds in the Fund
Complex. Mr. Medaugh serves as Director and President of two funds and as
President of two other funds in the Fund Complex. Mr. Hale serves as Chairman of
four funds and as a director of eight other funds in the Fund Complex. Messrs.
Cunnane, Kroeger, Levy and McDonald serve as Directors of each of the funds in
the Fund Complex. Ms. Lazar and Ms. Butler serve as Vice Presidents and Ms.
Beeler and Mr. Reilly serve as Assistant Vice Presidents of four funds in the
Fund Complex. Ms. Olmert serves as Secretary, Mr. Finelli serves as Treasurer
and Mr. Liotta serves as Assistant Secretary, respectively, of each of the funds
in the Fund Complex.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of the Advisor or the Fund's administrator may be considered to have received
remuneration indirectly. As compensation from the Fund, each Director who is not
an "interested person" of the Fund (as defined in the Investment Company Act)
(an "Independent Director") receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his attendance
at Board and committee meetings) from all Flag Investors/ISI Funds and BT Alex.
Brown Cash Reserve Fund, Inc. for which he serves. In addition, the Chairman of
the Fund Complex's Audit Committee receives an aggregate annual fee from the
Fund Complex. Payment of such fees and expenses is allocated among all such
funds described above in direct proportion to their relative net assets. For the
fiscal year ended October 31, 1997, Independent Directors' fees attributable to
the assets of the Fund totaled $3,504. The following table shows aggregate
compensation payable to each of the Fund's Directors by the Fund and the Fund
Complex, respectively, and pension or retirement benefits accrued as part of
Fund expenses in the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation Pension or Total Compensation From the
Position From the Fund for the Retirement Benefits Fund and Fund Complex Payable
Fiscal Year Ended Accrued as Part of to Directors for the Fiscal Year
October 31, 1997 Fund Expenses Ended October 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edward S. Hyman(1) $0 $0 $0
Chairman
R. Alan Medaugh(1) $0 $0 $0
Director & President
Richard T. Hale(1) $0 $0 $0
Vice Chairman
W. James Price(1,2) $0 $0 $0
Vice Chairman
James J. Cunnane $773(3) (4) $39,000 for service on
Director 13 Boards in Fund Complex
John F. Kroeger $972(3) (4) $49,000 for service on
Director 13 Boards in Fund Complex
Louis E. Levy $773(3) (4) $39,000 for service on
Director 13 Boards in Fund Complex
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation Pension or Total Compensation From the
Position From the Fund for the Retirement Benefits Fund and Fund Complex Payable
Fiscal Year Ended Accrued as Part of to Directors for the Fiscal Year
October 31, 1997 Fund Expenses Ended October 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eugene J. McDonald $773(3) (4) $39,000 for service on
Director 13 Boards in Fund Complex
Harry Woolf(2) $213(3) (4) $9,750 for service on
Director 12 Boards in Fund Complex
</TABLE>
- ----------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Retired, effective December 31, 1996. Mr. Woolf was appointed President
of certain funds in the Fund Complex. For serving as President, Mr.
Woolf receives compensation from such funds, in addition to his
retirement benefits.
(3) Of the amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald and
Woolf, $773, $0, $0, $773 and $213, respectively, was deferred pursuant
to a deferred compensation plan.
(4) The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense allocated
to the Fund for the fiscal year ended October 31, 1997 was
approximately $6,920.
The Fund Complex has adopted a retirement plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by him in his last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he served after completion of the first five years, up to a
maximum annual benefit of 50% of the fee earned by him in his last year of
service. The fee will be paid quarterly, for life, by each Fund for which he
serves. The Retirement Plan is unfunded and unvested. Mr. Kroeger has qualified
but has not received benefits. The Fund has two Participants, a Director who
retired effective December 31, 1994 and a Director who retired effective
December 31, 1996, each of whom has qualified for the Retirement Plan by serving
thirteen years and fourteen years, respectively, as Directors in the Fund
Complex and who will be paid a quarterly fee of $4,875 by the Fund Complex for
the rest of his life. Such fee is allocated to each fund in the Fund Complex
based upon the relative net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his last year of
service, as described above. The approximate credited years of service at
December 31, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger, 15
years; for Mr. Levy, 3 years; and for Mr. McDonald, 5 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to defer a
minimum of 50%, or up to all, of his annual compensation pursuant to a Deferred
Compensation Plan. Messrs. Cunnane, Levy and McDonald have each executed a
Deferred Compensation Agreement.
- 14 -
<PAGE>
Currently, the deferring Directors may select from among various Flag Investors
funds and BT Alex. Brown Cash Reserve Fund, Inc. in which all or part of their
deferral account shall be deemed to be invested. Distributions from the
deferring Directors deferral accounts will be paid in cash, in generally equal
quarterly installments over a period of ten years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act (the "Code of Ethics").
The Code of Ethics applies to the personal investing activities of directors and
officers of the Fund, as well as to designated officers, directors and employees
of the Advisor and the Distributors. As described below, the Code of Ethics
imposes significant restrictions on the Advisor's investment personnel,
including the portfolio managers and employees who execute or help execute a
portfolio manager's decisions or who obtain contemporaneous information
regarding the purchase or sale of a security by the Fund.
The Code of Ethics requires that any officer, director or employee of
the Fund, International Strategy & Investment Group, Inc. or the Advisor,
preclear any personal securities investments (with certain exceptions, such as
non-volitional purchases or purchases which are part of an automatic dividend
reinvestment plan). The foregoing would also apply to any officer, director or
employee of ICC Distributors Inc. that is an access person. The preclearance
requirement and associated procedures are designed to identify any substantive
prohibition or limitation applicable to the proposed investment. The substantive
restrictions applicable to investment personnel include a ban on acquiring any
securities in an initial public offering, a prohibition from profiting on
short-term trading in securities and special preclearance of the acquisition of
securities in private placements. Furthermore, the Code of Ethics provides for
trading "blackout periods" that prohibit trading by investment personnel and
certain other employees within periods of trading by the Fund in the same
security. Officers, directors and employees of the Advisor and the Distributors
may comply with codes of ethics instituted by those entities so long as they
contain similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
International Strategy & Investment Inc. ("ISI" or the "Advisor")
serves as the Fund's investment advisor pursuant to an investment advisory
agreement dated as of April 1, 1991 (the "Investment Advisory Agreement"). ISI
is a registered investment advisor that was formed in January, 1991. ISI employs
Messrs. Edward S. Hyman, the Fund's Chairman and R. Alan Medaugh, the Fund's
President. ISI is also the investment advisor to Total Return U.S. Treasury
Fund, Inc.; North American Government Bond Fund, Inc. and ISI Strategy Fund,
Inc.
Under the Investment Advisory Agreement, the Advisor obtains and
evaluates economic, statistical and financial information to formulate and
implement investment policies for the Fund. Any investment program undertaken by
the Advisor will at all times be subject to policies and control of the Fund's
Board of Directors. The Advisor will provide the Fund with office space for
managing its affairs, with the services of required executive personnel and with
certain clerical and bookkeeping services and facilities. These services are
provided by the Advisor without reimbursement by the Fund for any costs. The
Advisor shall not be liable to the Fund or its shareholders for any act or
omission by the Advisor or any losses sustained by the Fund or its shareholders
except in the case of willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty. As compensation for its services, the Advisor is
entitled to receive an annual fee from the Fund, payable monthly, at the annual
rate of 0.40% of the Fund's average daily net assets. The Advisor and the
Administrator have voluntarily agreed to reduce proportionately their respective
annual fees, if necessary, so that the Fund's annual expenses do not exceed
0.90% of the average
- 15 -
<PAGE>
daily net assets of either the Flag Investors Shares or the ISI Shares Classes.
The services of the Advisor to the Fund are not exclusive and the Advisor is
free to render similar services to others.
The Advisor is responsible for decisions to buy and sell securities for
the Fund, for broker-dealer selection, and for negotiation of commission rates
under standards established and periodically reviewed by the Board of Directors.
Because purchases and sales of securities by the Fund will usually be principal
transactions, the Fund will incur little, if any, brokerage commission expense.
The Advisor's primary consideration in effecting securities transactions will be
to obtain best price and execution. To the extent that the execution and prices
of more than one dealer are comparable, the Advisor may, in its discretion,
effect transactions with dealers that furnish statistical research or other
information or services that may benefit the Fund's investment program.
The Investment Advisory Agreement will continue in effect from year to
year after its initial two year term if such continuance is specifically
approved at least annually by the Fund's Board of Directors, including a
majority of the Independent Directors who have no direct or indirect financial
interest in such agreements, by votes cast in person at a meeting called for
such purpose, and by a vote of a majority of the outstanding Shares (as defined
under "Capital Stock"). The Investment Advisory Agreement was most recently
approved by the Board of Directors in the foregoing manner on September 16,
1997. The Fund or the Advisor may terminate the Investment Advisory Agreement on
60 days' written notice without penalty. The Investment Advisory Agreement will
terminate automatically in the event of assignment (as defined in the Investment
Company Act).
Advisory fees paid by the Fund to ISI for the last three fiscal years
were as follows:
Year Ended October 31,
----------------------
1997 1996 1995
---- ---- ----
$ 323,888(1) $ 323,403(2) $353,743(3)
- ----------
(1) Net of fee waivers of $157,087.
(2) Net of fee waivers of $192,777.
(3) Net of fee waivers of $177,885.
7. ADMINISTRATION
Investment Company Capital Corp. ("ICC" or the "Administrator")
provides administration services to the Fund including: monitoring the Fund's
regulatory compliance, supervising all aspects of the Fund's service providers,
arranging, but not paying for, the printing and mailing of prospectuses, proxy
materials and shareholder reports, preparing and filing all documents required
by the securities laws of any state in which the Shares are sold, establishing
the Fund's budgets, monitoring the Fund's distribution plan, preparing the
Fund's financial information and shareholder reports, calculating dividend and
distribution payments and arranging for the preparation of state and federal tax
returns.
As compensation for providing administration services to the Fund, the
Administrator is entitled to receive an annual fee, calculated daily and paid
monthly, at the annual rate of 0.20% of the Fund's average daily net assets. The
Administrator and the Advisor have voluntarily agreed to reduce proportionately
their respective fees, if necessary, so that the annual expenses for the Flag
Investors Shares and the ISI Shares Classes do not exceed 0.90% of such classes'
respective average daily net assets.
- 16 -
<PAGE>
Administration fees paid by the Fund to ICC for the last three fiscal
years were as follows:
Year Ended October 31,
----------------------
1997 1996 1995
---- ---- ----
$ 164,190(1) $ 159,950(2) $176,872(3)
- ----------
(1) Net of fee waivers of $76,298.
(2) Net of fee waivers of $98,140.
(3) Net of fee waivers of $88,942.
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.") ICC
is an indirect subsidiary of Bankers Trust New York Corporation.
8. DISTRIBUTION OF FUND SHARES
International Strategy & Investment Group Inc. ("ISI Group") serves as
Distributor for the ISI Shares pursuant to a Distribution Agreement effective
April 1, 1997 ("ISI Distribution Agreement"). Prior to April 1, 1997, Armata
Financial Corp. served as Distributor for the ISI Shares for the same rate of
compensation and on substantially the same terms as the ISI Distribution
Agreement. ICC Distributors Inc. ("ICC Distributors") serves as Distributor for
the Flag Investors Shares pursuant to an agreement effective August 31, 1997
("Flag Distribution Agreement"). Prior to August 31, 1997, Alex. Brown & Sons
Incorporated ("Alex. Brown") served as Distributor for the Flag Investors Shares
for the same rate of compensation and on substantially the same terms as the
Flag Distribution Agreement. The Distribution Agreements provide that ICC
Distributors (in the case of the Flag Investors Shares) or ISI Group (in the
case of the ISI Shares) has the exclusive right to distribute the related class
of Shares either directly or through other broker-dealers.
The ISI Distribution Agreement provides that ISI Group on behalf of the
ISI Shares (i) will solicit and receive orders for the purchase of ISI Shares
(ii) accept or reject such orders on behalf of the Fund in accordance with the
Fund's currently effective prospectus and transmit such orders as are accepted
to the Fund's transfer agent as promptly as possible (iii) receive requests for
redemption and transmit such redemption requests to the Fund's transfer agent as
promptly as possible (iv) respond to inquiries from the Fund's shareholders
concerning the status of their accounts with the Fund; (v) provide the Fund's
Board of Directors for their review with quarterly reports required by Rule
12b-1; (vi) maintain such accounts, books and records as may be required by law
or be deemed appropriate by the Fund's Board of Directors; and (vii) take all
actions deemed necessary to carry into effect the distribution of the Shares.
Pursuant to the ISI Distribution Agreement, ISI has not undertaken to sell any
specific number of ISI Shares. The ISI Distribution Agreement further provides
that, in connection with the distribution of Shares, ISI Group will be
responsible for all promotional expenses. The services by ISI Group to the Fund
are not exclusive, and ISI Group shall not be liable to the Fund or its
shareholders for any act or omission by ISI Group or any losses sustained by the
Fund or its shareholders except in the case of willful misfeasance, bad faith,
gross negligence, or reckless disregard of duty.
The Flag Distribution Agreement provides that ICC Distributors shall;
(i) use reasonable efforts to sell Flag Investors Shares upon the terms and
conditions contained in the Flag Distribution Agreement and the Fund's then
current Prospectus; (ii) use its best efforts to conform
- 17 -
<PAGE>
with the requirements of all federal and state laws relating to the sale of the
Flag Investors Shares; (iii) adopt and follow procedures as may be necessary to
comply with the requirements of the National Association of Securities Dealers,
Inc. and any other applicable self-regulatory organization; (iv) perform its
duties under the supervision of and in accordance with the directives of the
Fund's Board of Directors and the Fund's Articles of Incorporation and By-Laws;
and (v) provide the Fund's Board of Directors with a written report of the
amounts expended in connection with the Flag Distribution Agreement. Pursuant to
the Flag Distribution Agreement, ICC Distributors shall devote reasonable time
and effort to effect sales of Flag Investors Shares but shall not be obligated
to sell any specific number of Shares. The services of ICC Distributors are not
exclusive and ICC Distributors shall not be liable to the Fund or its
shareholders for any error of judgment or mistake of law, for any losses arising
out of any investment, or for any action or inaction of the ICC Distributors in
the absence of bad faith, willful misfeasance or gross negligence in the
performance of ICC Distributors' duties or obligations under the Flag
Distribution Agreement or by reason of ICC Distributors' reckless disregard of
its duties and obligations under the Flag Distribution Agreement. The Flag
Distribution Agreement further provides that the Fund and ICC Distributors will
mutually indemnify each other for losses relating to disclosures in the Fund's
registration statement.
The Distribution Agreements may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Flag Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect from year to year with respect to each class of the Fund provided that it
is approved at least annually by (i) a vote of a majority of the outstanding
voting securities of the related class of the Fund or (ii) a vote of a majority
of the Fund's Board of Directors including a majority of the Independent
Directors and, with respect to each Flag Investors' class of the Fund for which
there is a plan of distribution, so long as such plan of distribution is
approved at least annually by the Independent Directors in person at a meeting
called for the purpose of voting on such approval (see below). The ISI
Distribution Agreement has an initial term of two years and will remain in
effect from year to year provided that it is specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of a
majority of the Independent Directors by votes cast in person at a meeting
specifically called for such purpose. The Flag Distribution Agreement, including
the form of Sub-Distribution Agreement, was initially approved by the Board of
Directors, including a majority of the Independent Directors, on August 4, 1997.
The ISI Distribution Agreement, including the form of Sub-Distribution
Agreement, was most recently approved by the Board of Directors, including a
majority of the Independent Directors, including the form of Sub-Distribution
Agreement, on September 16, 1997.
ICC Distributors and ISI Group have entered into Sub-Distribution
Agreements with Participating Dealers ("Participating dealers") under which such
Participating Dealers have agreed to process investor purchase and redemption
orders and respond to inquiries from shareholders concerning the status of their
accounts and the operations of the Fund. Any Sub-Distribution Agreement may be
terminated in the same manner as the Distribution Agreements at any time and
shall automatically terminate in the event of an assignment.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as BT Alex. Brown and certain banks,
to act as Shareholder Servicing Agents, pursuant to which ICC Distributors and
ISI Group will allocate a portion of their respective distribution fees as
compensation for such financial institutions' ongoing shareholder services. The
Fund may also enter into Shareholder Servicing Agreements pursuant to which the
Distributors or the Fund's administrator or their respective affiliates will
provide compensation out of its own resources for ongoing shareholder services.
Although banking laws and regulations prohibit banks
- 18 -
<PAGE>
from distributing shares of open-end investment companies such as the Fund,
according to interpretations from various bank regulatory authorities, financial
institutions are not prohibited from acting in other capacities for investment
companies, such as the shareholder servicing capacities described above. Should
future legislative, judicial or administrative action prohibit or restrict the
activities of the Shareholder Servicing Agents in connection with the
Shareholder Servicing Agreements, the Fund may be required to alter materially
or discontinue its arrangements with the Shareholder Servicing Agents.
As compensation for providing distribution and related administrative
services as described above, the Fund will pay ICC Distributors for the Flag
Investors Class A Shares and ISI Group for the ISI Shares, on a monthly basis,
an annual fee, equal to 0.25% of the average daily net assets of the respective
class of Shares. The Distributors expect to allocate up to all of their fees to
Participating Dealers and Shareholder Servicing Agents.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributors received fees
in the following amounts:
- --------------------------------------------------------------------------------
Fiscal Year Ended October 31,
Class 1997 1996 1995
- --------------------------------------------------------------------------------
Flag Investors Class A 12b-1 $ 98,275(1) $ 109,247(3) $120,214(3)
- --------------------------------------------------------------------------------
ISI Shares 12b-1 $ 202,335(2) $ 213,366(4) $212,053(4)
- --------------------------------------------------------------------------------
- ------------
(1) Of this amount, Alex. Brown, the Flag Investors Shares' distributor
prior to August 31, 1997, received $82,194 and ICC Distributors, the
Flag Investors Shares' distributor effective August 31, 1997, received
$16,081.
(2) Of this amount, Armata, the ISI Shares' distributor prior to April 1,
1997, received $85,542 and ISI Group, the ISI Shares' distributor
effective April 1, 1997, received $116,793.
(3) Fees received by Alex. Brown, the Flag Investors Shares' distributor
for the fiscal years ended October 31, 1996 and 1995.
(4) Fees received by Armata, the ISI Shares' distributor for the fiscal
years ended October 31, 1996 and October 31 1995.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for each of its classes of Shares (the "Plans"). Under the Plans, the Fund pays
a fee to ICC Distributors or ISI Group for distribution and other shareholder
servicing assistance as set forth in the related Distribution Agreement, and ICC
Distributors and ISI Group are authorized to make payments out of their fees to
Participating Dealers and Shareholder Servicing Agents. The Plans will remain in
effect from year to year as specifically approved (a) at least annually by the
Fund's Board of Directors and (b) by the affirmative vote of a majority of the
Independent Directors, by votes cast in person at a meeting called for such
purpose. The Plans were most recently approved by the Fund's Board of Directors,
including a majority of the Independent Directors, on September 16, 1997.
In approving the Plans, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each
- 19 -
<PAGE>
subsequent year. The Plans may not be amended to increase materially the fee to
be paid pursuant to the Distribution Agreements without the approval of the
shareholders of the respective classes of the Fund. The Plans may be terminated
at any time by a vote of a majority of the Fund's Independent Directors or by a
vote of a majority of the outstanding Shares.
During the continuance of the Plans, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plans to ICC Distributors or ISI Group pursuant to
the Distribution Agreements, to Participating Dealers pursuant to
Sub-Distribution Agreements and to Shareholder Servicing Agents pursuant to
Shareholder Servicing Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Independent Directors shall be
committed to the discretion of the Independent Directors then in office.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
or ISI Group, as appropriate, with respect to shares held by or on behalf of
customers of such entities. Payments under the Plans are made as described above
regardless of the distributor's actual cost of providing distribution services
and may be used to pay such distributor's overhead expenses. If the cost of
providing distribution services to the Fund in connection with the sale of the
Flag Investors Class A Shares or the ISI Shares is less than 0.25% of such
Shares' average daily net assets for any period the unexpended portion of the
distribution fee may be retained by the distributor. The Plans do not provide
for any charges to the Fund for excess amounts expended by the distributor and,
if a Plan is terminated in accordance with its terms, the obligation of the Fund
to make payments to the distributor pursuant to the Plan will cease and the Fund
will not be required to make any payments past the date the related Distribution
Agreement terminates. In return for payments received pursuant to the Plans in
the fiscal years ended October 31, 1997, October 31, 1996 and October 31, 1995,
respectively, the Fund's distributors, as appropriate, paid the
distribution-related expenses of the Fund including one or more of the
following: advertising expenses; printing and mailing of prospectuses to other
than current shareholders; compensation to dealers and sales personnel; and
interest, carrying or other financing charges.
For the last three fiscal years, the distributor for the Flag Investors
Shares received the following commissions or contingent deferred sales charges,
and from such commissions or sales charges, the distributor retained the
following amounts:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Class 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
Received Retained Received Retained Received Retained
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 13,936(1) $ 12,636(3) $ 27,710(5) $ 26,210(5) $ 63,394(5) $62,002(5)
Commissions
- ------------------------------------------------------------------------------------------------------------------------------------
ISI Shares $ 38,812(2) $ 0(4) $ 92,720(6) $ 30,319(6) $ 353,850(6) $ 18,641(6)
Commissions
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Flag Investors Shares' distributor
prior to August 31, 1997, received $13,936 and ICC Distributors, the
Flag Investors Shares' distributor effective August 31, 1997, received
$0.
(2) Of this amount, Armata, the ISI Shares' distributor prior to April 1,
1997, received $13,150 and ISI Group, the ISI Shares' distributor
effective April 1, 1997 received $25,662.
- 20 -
<PAGE>
(3) Of commissions received, Alex. Brown retained $1,300 and ICC
Distributors retained $0, respectively.
(4) Of commissions received, Armata retained $0 and ISI Group
retained $0, respectively
(5) By Alex. Brown, the Flag Investors Shares' distributor for the fiscal
years ended October 31, 1996 and October 31, 1995.
(6) By Armata, the ISI Shares' distributor for the fiscal years ended
October 31, 1996 and October 31, 1995.
Except as described elsewhere, the Fund pays or causes to be paid all
continuing expenses of the Fund, including, without limitation: investment
advisory, administration and distribution fees; the charges and expenses of any
registrar, any custodian or depository appointed by the Fund for the safekeeping
of cash, portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions, if any,
chargeable to the Fund in connection with portfolio securities transactions to
which the Fund is a party; all taxes, including securities issuance and transfer
taxes, and corporate fees payable by the Fund to federal, state or other
governmental agencies; the costs and expenses of engraving or printing of
certificates representing Shares; all costs and expenses in connection with the
maintenance of registration of the Fund and its Shares with the SEC and various
states and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of printing, including
typesetting and distributing prospectuses of the Fund and supplements thereto to
the shareholders; all expenses of shareholders' and Directors' meetings and of
preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Independent Directors and Independent members of any
advisory board or committee; all expenses incident to the payment of any
dividend, distribution, withdrawal or redemption, whether in Shares or in cash;
charges and expenses of any outside service used for pricing of the Shares; fees
and expenses of legal counsel or independent accountants, in connection with any
matter relating to the Fund; membership dues of industry associations; interest
payable on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto); and
all other charges and costs of the Fund's operation unless otherwise explicitly
assumed by ISI, ICC, ISI Group or ICC Distributors.
9. PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell securities for
the Fund, for broker-dealer selection and for negotiation of commission rates.
The Advisor may direct purchase and sale orders to any broker-dealer.
Municipal obligations and other debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the prices
at which securities are purchased and sold from and to dealers include a
dealer's mark-up or mark-down. The Advisor attempts to negotiate with
underwriters to decrease the commission or concession for the benefit of the
Fund. The Advisor normally seeks to deal directly with the primary market makers
unless, in its opinion, better prices are available elsewhere. Securities firms
or futures commission merchants may receive brokerage commissions on
transactions involving Futures Contracts. On occasion, certain money market
instruments may be purchased directly from an issuer without payment of a
commission or concession.
The Advisor's primary consideration in effecting securities
transactions is to obtain best price and execution of orders on an overall
basis. As described below, however, the Advisor
- 21 -
<PAGE>
may, in its discretion, effect transactions with broker-dealers that furnish
statistical, research or other information or services which are deemed by the
Advisor to be beneficial to the Fund's investment program. Certain research
services furnished by broker-dealers may be useful to the Advisor with clients
other than the Fund.
Similarly, any research services received by the Advisor through
placement of portfolio transactions of other clients may be of value to the
Advisor in fulfilling its obligations to the Fund. No specific value can be
determined for research and statistical services furnished without cost to the
Advisor by a broker-dealer. The Advisor is of the opinion that because the
material must be analyzed and reviewed by its staff, its receipt does not tend
to reduce expenses, but may be beneficial in supplementing the Advisor's
research and analysis. Therefore, it may tend to benefit the Fund by improving
the Advisor's investment advice. The Advisor's policy is to pay a broker-dealer
higher commissions for particular brokerage transactions, if any, than might be
charged if a different broker-dealer had been chosen when, in the Advisor's
opinion, this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors, the
Advisor is also authorized to pay broker-dealers higher commissions on brokerage
transactions than another broker might have charged on brokerage transactions
for the Fund for brokerage or research services. The allocation of orders among
broker-dealers and the commission rates paid by the Fund will be reviewed
periodically by the Board. During the fiscal years ended October 31, 1997,
October 31, 1996 and October 31, 1995 no brokerage commissions were paid by the
Fund for research services.
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of October 31, 1997,
the Fund held a 5.60% repurchase agreement issued by Goldman Sachs & Co. valued
at $10,140,000. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.
The Advisor manages other investment accounts. It is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose to
hold its investment in such securities may likewise vary. The timing and amount
of purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by the Advisor. The Advisor may combine such transactions, in
accordance with applicable laws and regulations, in order to obtain the best net
price and most favorable execution. Such simultaneous transactions, however,
could adversely affect the ability of the Fund to obtain or dispose of the full
amount of a security which it seeks to purchase or sell.
10. CAPITAL STOCK
The Fund is authorized to issue 40 million Shares of common stock, par
value $.001 per Share. The Board of Directors may increase or decrease the
number of authorized Shares without shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of shares by the Directors at any time
without shareholder approval. The Fund has created four classes of Shares: ISI
Shares, Flag Investors Class A Shares (formerly known as Flag Investors Managed
Municipal Fund Shares), Flag Investors Managed Municipal
- 22 -
<PAGE>
Fund Class B Shares and Flag Investors Managed Municipal Fund Class D Shares.
The Flag Investors Managed Municipal Fund Class B Shares and the Flag Investors
Managed Municipal Fund Class D Shares are not currently being offered. All
Shares of the Fund regardless of class would have equal rights with respect to
voting, except that with respect to any matter affecting the rights of the
holders of a particular series or class, the holders of each series would vote
separately. Any such series would be a separately managed portfolio and
shareholders of each series would have an undivided interest in the net assets
of that series. For tax purposes, the series would be treated as separate
entities. Generally, each class of shares issued by a particular series will be
identical to every other class and expenses of the Fund (other than 12b-1 fees)
are prorated among all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively would be voted on by the
holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting together
for election of Directors may elect all the members of the Board of Directors of
the Fund. In such event, the remaining holders cannot elect any members of the
Board of Directors of the Fund. There are no preemptive, conversion or exchange
rights applicable to any of the Shares. The issued and outstanding Shares are
fully paid and non-assessable. In the event of liquidation or dissolution of the
Fund, each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of shares if there is more than one series) after
all debts and expenses have been paid.
As used in this Statement of Additional Information, the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
11. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants.
12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust") has been retained to act as
custodian of the Fund's investments. Bankers Trust receives such compensation
from the Fund for its services as Custodian as may be agreed to from time to
time by Bankers Trust and the Fund. For the period from September 22, 1997
through October 31, 1997, Bankers Trust accrued custodian fees of $2,341.
Investment Company Capital Corp. has been retained to act as the Fund's transfer
and dividend disbursing agent. As compensation for these services, ICC receives
up to $10.62 per account per year plus reimbursement for out-of-pocket expenses
incurred in connection therewith. For the fiscal year ended October 31, 1997,
such fees totaled $56,933.
ICC also provides accounting services to the Fund. As compensation for
providing accounting services, ICC is entitled to receive an annual fee,
calculated daily and paid monthly as shown below.
- 23 -
<PAGE>
Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------
$ 0 - $ 10,000,000 $13,000 (fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with ICC's provision of accounting
services: express delivery service, independent pricing and storage. As
compensation for providing accounting services for the fiscal year ended October
31, 1997, ICC received fees of $58,038.
13. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P. whose report thereon appears elsewhere herein, and has been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing. Coopers & Lybrand L.L.P.
has offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.
14. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the
1-, 5- or 10-year periods (or fractional
portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1-, 5-
or 10-year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one-, five- and ten-year periods or a shorter
- 24 -
<PAGE>
period dating from the effectiveness of the Fund's registration statement or the
date the Fund (or a series) commenced operations (provided such date is
subsequent to the date the registration statement became effective). In
calculating the ending redeemable value, the maximum sales load is deducted from
the initial $1,000 payment and all dividends and distributions by the Fund are
assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. "T" in the formula above
is calculated by finding the average annual compounded rate of return over the
period that would equate an assumed initial payment of $1,000 to the ending
redeemable value. Any sales loads that might in the future be made applicable at
the time to reinvestments would be included as would any recurring account
charges that might be imposed by the Fund.
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 investment for the periods
ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
One-Year Period Ended Five-Year Period Ended
October 31, 1997 October 31, 1997 Since Inception
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Ending Annual Ending Annual Ending Annual
Class Redeemable Total Redeemable Total Redeemable Total
Value Return Value Return Value Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Flag Investors
Class A Shares $1,025.91 2.59% $1,325.27 5.79% $1,576.94 6.70%
*October 23, 1990
- ------------------------------------------------------------------------------------------------------------------------------------
ISI Shares
*February 26, 1990 $1,026.47 2.64% $1,325.99 5.80% $1,617.93 6.46%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* Inception Date
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
in order to compare more accurately the Fund's performance with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc. or Morningstar, Inc., with the performance of the Lehman Brothers Municipal
Bond Index, the Consumer Price Index, the return on 90-day U.S. Treasury bills,
the Standard and Poor's 500 Stock Index or the Dow Jones Industrial Average, the
Fund calculates its aggregate and average annual total return for the specified
periods of time by assuming the investment of $10,000 in Shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. For the purpose of other comparisons, the Fund performs a
second alternative computation for its aggregate and average annual total return
by assuming the investment of $10,000 in Shares and assuming no reinvestment of
dividends or other distributions.
Any yield quotation of the Fund is based on the annualized net
investment income per share of the Fund over a 30-day period. The yield for the
Fund is calculated by dividing the net
- 25 -
<PAGE>
investment income per share of the Fund earned during the period by the maximum
offering price per share of the Fund on the last day of that period. The
resulting figure is then annualized. Net investment income per share is
determined by dividing (i) the dividends and interest earned by the Fund during
the period, minus accrued expenses for the period, by (ii) the average number of
Fund shares entitled to receive dividends during the period multiplied by the
maximum offering price per share on the last day of the period. The Fund's yield
calculations assume a maximum sales charge of 4.45% for the ISI Shares and 4.50%
for the Flag Investors Class A Shares. The Fund's taxable-equivalent yield is
calculated by determining the rate of return that would have to be achieved on a
fully taxable investment to produce the after-tax equivalent on the Fund's
yield. In calculating taxable-equivalent yield, the Fund assumes certain
brackets for shareholders.
For the 30-day period ended October 31, 1997, the yield for the ISI
Shares was 4.05% and the yield for the Flag Investors Class A Shares was 4.05%.
For the same 30-day period, the taxable-equivalent yield (for an investor in the
31% tax bracket) was 5.87% for the ISI Shares and 5.87% for the Flag Investors
Class A Shares.
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. The Fund's portfolio
turnover rate in fiscal year 1997 was 26% and in fiscal year 1996 was 32%,
respectively.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, no shareholder owned beneficially 5% or
more of the Fund's outstanding Shares, as of February 2, 1998.
As of such date directors and officers, as a group, owned beneficially
and of record less than 1% of the Fund's outstanding Shares of either class.
16. FINANCIAL STATEMENTS.
See next page.
- 26 -
<PAGE>
AB FI MANAGED MUNICIPAL
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1997
<TABLE>
<CAPTION>
Rating* Par Market Value
Issuer (Moody's/S&P) (000) (Note 1)
- -----------------------------------------------------------------------------------
<S><C>
MUNICIPAL BONDS--93.5%
General Obligation--73.9%
Arlington, TX, Independent School
District, 5.75%, 2021 Aaa/NR** $5,000 $ 5,131,100
Charlotte, NC:
5.30%, 2011 Aaa/AAA 1,590 1,653,203
5.30%, 2012 Aaa/AAA 2,325 2,408,724
5.30%, 2012 Aaa/AAA 1,120 1,160,331
5.80%, 2016 Aaa/AAA 2,500 2,642,725
Chicago, IL, 6.30%, 2009 Aa2/AA 1,000 1,119,360
Dallas, TX, 5.00%, 2010 Aa1/AAA 1,750 1,764,753
Delaware State, Series "A",
5.125%, 2016 Aa1/AA+ 2,150 2,133,209
DuPage County, IL, Jail Project,
5.60%, 2021 Aaa/AAA 1,600 1,670,032
Florida Board of Education, Refunding
Public Education:
6.125%, 2012 Aa2/AA+ 2,250 2,402,730
5.50%, 2021 Aa2/AA+ 2,000 2,009,400
5.125%, 2022 Aa2/AA+ 5,000 4,833,650
Florida State Department of
Transportation, 5.80%, 2018 Aa2/AA+ 2,000 2,085,540
Franklin County, OH:
5.45%, 2009 Aaa/AAA 1,500 1,569,330
5.50%, 2013 Aaa/AAA 1,000 1,025,510
Georgia State, Series "D":
5.25%, 2009 Aaa/AAA 1,580 1,653,296
5.00%, 2010 Aaa/AAA 2,000 2,031,940
Grand Prairie, TX, School District,
5.20%, 2018 Aaa/AAA 2,000 1,980,060
Henrico County, VA, 5.25%, 2009 Aaa/AAA 1,000 1,032,600
Maryland State & Local Facilities,
Second Series, 5.125%, 2010 Aaa/AAA 3,000 3,076,860
Metropolitan Government of Nashville,
Davidson County, TN, 5.125%, 2019 Aa2/AA 4,000 3,945,320
Minneapolis, MN, Sports Arena:
5.00%, 2011 Aaa/AAA 1,710 1,716,823
5.00%, 2012 Aaa/AAA 1,920 1,923,014
</TABLE>
- 27 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Rating* Par Market Value
Issuer (Moody's/S&P) (000) (Note 1)
- -----------------------------------------------------------------------------------
<S><C>
MUNICIPAL BONDS--continued
General Obligation--concluded
Minneapolis, MN, Series "B",
5.20%, 2013 Aaa/AAA $ 3,200 $ 3,222,272
Minnesota State, 5.00%, 2014 Aaa/AAA 2,500 2,469,000
Missouri State Building, Series "A",
5.75%, 2014 Aaa/AAA 1,000 1,060,540
Plano, TX, Independent School District,
5.00%, 2011 Aaa/AAA 3,000 2,979,630
Portland, OR, Metro, 5.25%, 2007 Aa/AA+ 1,500 1,561,425
Salt Lake County, UT, 5.25%, 2010 Aaa/AA+ 2,000 2,054,420
South Carolina Capital Improvement:
5.00%, 2009 Aaa/AAA 2,700 2,754,324
5.625%, 2014 Aaa/AAA 2,700 2,824,362
State of Tennessee:
Series "A", 5.50%, 2009 Aaa/AA+ 1,535 1,608,388
Series "A", 5.55%, 2010 Aaa/AA+ 1,000 1,044,830
State of Texas, 6.00%, 2014 Aa2/AA 2,000 2,131,500
Virginia State, 5.375%, 2012 Aaa/AAA 1,000 1,027,970
Washington State:
Series "A", 5.60%, 2010 Aa1/AA+ 1,500 1,570,935
Series "R", 5.00%, 2014 Aa1/AA+ 2,250 2,207,452
Series "E", 5.00%, 2022 Aa1/AA+ 2,000 1,912,500
Wisconsin State Series:
Series 1, 5.00%, 2015 Aa2/AA 1,000 978,320
Series "B", 5.00%, 2016 Aa2/AA 3,500 3,409,350
Series "B", 5.00%, 2018 Aa2/AA 1,000 966,400
------------
86,753,128
------------
Electric and Gas Utility Revenue--0.3%
San Antonio, TX, Electric & Gas Revenue,
Series "A", 6.50%, 2012 Aa1/AA 315 327,269
------------
Prerefunded Issues--13.1%
Arizona Highway Transportation Board,
6.00%, 2010 #AAA(dagger)/AAA 3,480 3,680,935
Florida Board of Education, Refunding
Public Education, 6.50%, 2012 #AAA(dagger)/
AA+ 2,500 2,756,925
</TABLE>
- 28 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) October 31, 1997
<TABLE>
<CAPTION>
Rating* Par Market Value
Issuer (Moody's/S&P) (000) (Note 1)
- -----------------------------------------------------------------------------------
<S><C>
MUNICIPAL BONDS--concluded
Prerefunded Issues--concluded
Howard County, MD, Consolidated
Public Improvements, Series "A",
6.90%, 2002 #AAA(dagger)/
AAA $ 1,000 $ 1,068,090
Jacksonville, FL, Electric Authority
Revenue, Scherer 4-1-A,
6.75%, 2021 #AAA(dagger)/AAA 1,000 1,087,740
Lower Colorado River Authority, Jr. Lien,
4th Supply, 5.25%, 2015 #AAA(dagger)/AAA 2,000 2,029,320
San Antonio, TX, Electric & Gas Revenue,
Series "A", 6.50%, 2012 #AAA(dagger)/AA 685 716,537
State of Hawaii, General Obligation:
7.00%, 2006 Aaa/(dagger) 750 802,958
6.125%, 2010 NR**/
(dagger)(dagger) 1,000 1,065,630
University of Texas, 6.50%, 2011 #AAA(dagger)/AAA 2,000 2,190,460
------------
15,398,595
------------
Transportation Revenue--4.9%
Kansas Transportation Revenue:
5.40%, 2009 Aa/AA 2,000 2,075,060
5.40%, 2009 Aa/AA 2,500 2,587,575
Virginia State Transportation Authority,
6.00%, 2010 Aa/AA 1,000 1,060,130
------------
5,722,765
------------
Other Revenue--1.3%
Indianapolis, IN, Local Public
Improvement Board, 6.00%, 2018 Aaa/AA+ 1,500 1,555,620
------------
Total Municipal Bonds
(Cost $105,730,300) 109,757,377
</TABLE>
- 29 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Market Value
Issuer (000) (Note 1)
- -----------------------------------------------------------------------------------
<S><C>
REPURCHASE AGREEMENT--8.6%
Goldman Sachs & Co., 5.60%
Dated 10/31/97, to be repurchased on 11/3/97,
collateralized by U.S. Treasury Notes
with a market value of $10,343,302.
(Cost $10,140,000) $10,140 $ 10,140,000
------------
Total Investment in Securities--102.1%
(Cost $115,870,300)*** 119,897,377
Liabilities in Excess of Other Assets, Net--(2.1%) (2,503,641)
------------
Net Assets--100.0% $117,393,736
============
Net Asset Value and Redemption Price Per:
Flag Investors Class A Share
($38,390,248 / 3,557,464 shares outstanding) $10.79
======
ISI Class Share
($79,003,488 / 7,322,827 shares outstanding) $10.79
======
Maximum Offering Price Per:
Flag Investors Class A Share
($10.79 / 0.9550) $11.30
======
ISI Class Share
($10.79 / 0.9555) $11.29
======
</TABLE>
- --------
* The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available as of October 31, 1997.
Ratings of issues have not been audited by Coopers & Lybrand
L.L.P.
** Not rated.
*** Also aggregate cost for federal tax purposes.
+ Moody's #AAA rating indicates advance refunded issues secured
by escrowed funds held in cash, held in trust or invested in
direct non-callable U.S. government obligations or non-callable
obligations unconditionally guaranteed by the U.S. government.
++ Prerefunded bonds backed by U.S. Treasury securities. Absent
prerefunding, this obligation is rated Aa3/A+.
See Notes to Financial Statements.
- 30 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
For the
Year Ended
October 31,
- -----------------------------------------------------------------------------------
1997
<S><C>
Investment Income (Note 1):
Interest $6,440,149
----------
Expenses:
Investment advisory fee (Note 2) 480,975
Distribution fee (Note 2) 300,610
Administration fee (Note 2) 240,488
Accounting fee (Note 2) 58,038
Transfer agent fee (Note 2) 56,933
Printing and postage 34,500
Legal 30,248
Audit 28,879
Registration fees 25,681
Miscellaneous 25,414
Custodian fee (Note 1) 21,363
Directors' fees 7,819
Insurance 4,811
----------
Total expenses 1,315,759
Less:Fees waived (Note 2) (233,385)
----------
Net expenses 1,082,374
----------
Net investment income 5,357,775
----------
Net realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 1,002,650
Change in unrealized appreciation or depreciation of investments 2,249,576
----------
Net gain on investments 3,252,226
----------
Net increase in net assets resulting from operations $8,610,001
==========
</TABLE>
See Notes to Financial Statements.
- 31 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ------------------------------------------------------------------------------------
1997 1996
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 5,357,775 $ 5,787,049
Net realized gain from security transactions 1,002,650 281,659
Change in unrealized appreciation or
depreciation of investments 2,249,576 (272,341)
------------ ------------
Net increase in net assets resulting
from operations 8,610,001 5,796,367
------------ ------------
Dividends to Shareholders from (Note 1):
Net investment income and
net realized short-term gains:
Flag Investors Class A Shares (1,919,815) (2,244,395)
ISI Class Shares (3,948,488) (4,374,225)
Net realized mid-term and long-term gains:
Flag Investors Class A Shares (129,060) (43,313)
ISI Class Shares (267,980) (82,292)
------------ ------------
Total distributions (6,265,343) (6,744,225)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 5,846,126 8,278,327
Value of shares issued in
reinvestment of dividends 3,443,291 3,789,940
Cost of shares repurchased (20,144,490) (17,488,342)
------------ ------------
Decrease in net assets derived from capital
share transactions (10,855,073) (5,420,075)
------------ ------------
Total decrease in net assets (8,510,415) (6,367,933)
Net Assets:
Beginning of year 125,904,151 132,272,084
------------ ------------
End of year $117,393,736 $125,904,151
============ ============
</TABLE>
See Notes to Financial Statements.
- 32 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Class A and ISI Class Shares
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the
Year Ended
October 31,
- ------------------------------------------------------------------------------------
1997
<S><C>
Per Share Operating Performance:
Net asset value at beginning of year $ 10.58
-------
Income from Investment Operations:
Net investment income 0.52
Net realized and unrealized gain/(loss) on investments 0.24
-------
Total from Investment Operations 0.76
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.52)
Distributions from net realized mid-term and
long-term gains (0.03)
-------
Total distributions (0.55)
-------
Net asset value at end of year $ 10.79
=======
Total Return(1) 7.43%
Ratios to Average Daily Net Assets:
Expenses(2) 0.90%
Net investment income(3) 4.46%
Supplemental Data:
Net assets at end of year:
Flag Investors Class A Shares $38,390
ISI Class Shares $79,003
Portfolio turnover rate 26%
</TABLE>
- --------
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory and administration fees (Note 2), the ratio
of expenses to average daily net assets would have been 1.10%, 1.13%, 1.10%,
1.11% and 1.14% for the years ended October 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(3) Without the waiver of advisory and administration fees (Note 2), the ratio
of net investment income to average daily net assets would have been 4.26%,
4.25%, 4.52%, 4.16% and 4.14% for the years ended October 31, 1997, 1996,
1995, 1994 and 1993, respectively.
- 33 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S><C>
Per Share Operating Performance:
Net asset value at beginning of year $ 10.65 $ 9.81 $ 11.10 $ 10.31
------- ------ ------- -------
Income from Investment Operations:
Net investment income 0.48 0.48 0.46 0.50
Net realized and unrealized gain/(loss) on investments -- 0.98 (1.15) 0.94
------- ------ ------- -------
Total from Investment Operations 0.48 1.46 (0.69) 1.44
------- ------ ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.54) (0.54) (0.56) (0.61)
Distributions from net realized mid-term and
long-term gains (0.01) (0.08) (0.04) (0.04)
------- ------ ------- -------
Total distributions (0.55) (0.62) (0.60) (0.65)
------- ------ ------- -------
Net asset value at end of year $ 10.58 $10.65 $ 9.81 $ 11.10
======= ====== ======= =======
Total Return(1) 4.67% 15.42% (6.49)% 14.36%
Ratios to Average Daily Net Assets:
Expenses(2) 0.90% 0.90% 0.90% 0.90%
Net investment income(3) 4.48% 4.72% 4.37% 4.38%
Supplemental Data:
Net assets at end of year:
Flag Investors Class A Shares $41,193 $45,980 $49,903 $53,486
ISI Class Shares $84,712 $86,292 $83,607 $88,378
Portfolio turnover rate 32% 55% 37% 68%
</TABLE>
See Notes to Financial Statements.
- 34 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Managed Municipal Fund, Inc. (the "Fund"), which was organized as a
Maryland Corporation on January 15, 1990 and commenced operations February 26,
1990, is registered under the Investment Company Act of 1940 as a diversified,
open-end investment management company. It is designed to provide a high level
of total return with relative stability of principal as well as the secondary
objective of high current income exempt from federal income tax through
investment in a portfolio consisting primarily of tax-free municipal
obligations.
The Fund consists of two share classes: ISI Managed Municipal Fund Shares
("ISI Class"), which commenced February 26, 1990, and Flag Investors Managed
Municipal Fund Class A Shares ("Flag Investors Class A"), which commenced
October 23, 1990.
The ISI Class Shares have a 4.45% maximum front-end sales charge and the
Flag Investors Class A Shares have a 4.50% maximum front-end sales charge. Both
classes have a 0.25% distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. Under certain circumstances, it is necessary to reclassify prior year
information in order to conform to the current year's presentation. The Fund's
significant accounting policies are:
A. Security Valuation--Municipal obligations are usually traded in the
over-the-counter market. When there is an available market quotation,
the Fund values a municipal obligation by using the most recent price
provided by an investment dealer. The Fund utilizes the services of an
independent pricing vendor to obtain prices. When a market quotation is
unavailable, the Investment Advisor determines a fair value using
procedures that the Board of Directors establishes and monitors. The
Fund values short-term obligations with maturities of 60 days or less at
amortized cost.
B. Repurchase Agreements--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
- 35 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
NOTE 1--concluded
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. Federal Income Taxes--The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as
it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
D. Security Transactions, Investment Income, Distributions and Other--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. Interest
income is recorded on an accrual basis and includes the pro rata
scientific method for amortization of premiums and accretion of
discounts when appropriate. Income and common expenses are allocated to
each class based on its respective average net assets. Class specific
expenses are charged directly to each class. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor and Investment Company Capital Corp. ("ICC"), an indirect subsidiary of
Bankers Trust New York Corporation, is the Fund's administrator. As compensation
for its advisory services, the Fund pays ISI an annual fee based on the Fund's
average daily net assets. This fee is calculated daily and paid monthly at
- 36 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--continued
the annual rate of 0.40%. As compensation for its administrative services, the
Fund pays ICC an annual fee based on the Fund's average daily net assets. This
fee is calculated daily and paid monthly at the annual rate of 0.20%.
ISI and ICC have agreed to reduce their fees proportionately when necessary
so that the Fund's annual expenses are no more than 0.90% of the Fund's average
daily net assets. For the year ended October 31, 1997, ISI waived fees of
$157,087 and ICC waived fees of $76,298.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or administrator.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $58,038 for accounting services for the year ended
October 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $56,933 for
transfer agent services for the year ended October 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNCBank served as the Fund's custodian.
From September 22, 1997 to October 31, 1997, the Fund accrued $2,341 in custody
expenses.
As compensation for providing distribution services for the ISI Class, the
Fund pays ISI Group Inc. ("ISI Group"), which is affiliated with ISI, an annual
fee that is calculated daily and paid monthly. This fee is paid at an annual
rate equal to 0.25% of the ISI Class' average daily net assets. Prior to April
1, 1997, Armata Financial Corp. served as the distributor for the ISI Class for
the same compensation and on substantially the same terms as ISI Group. As
compensation for providing distribution services for the Flag Investors Class A
Shares, the Fund pays ICC Distributors, Inc. ("ICC Distributors"), a member of
the Forum Financial Group of companies, an annual fee that is calculated daily
and paid monthly. This fee is paid at an annual rate equal to 0.25% of the Flag
Investors Class A Shares' average daily net assets. Prior to September 1, 1997,
Alex. Brown & Sons Incorporated served as the distributor for the Flag Investors
Class A Shares for the same compensation and on substantially the same terms as
ICC Distributors. For the year ended October 31, 1997, distribution fees
aggregated $300,610, of which $202,335 was attributable to the ISI Class Shares
and $98,275 was attributable to the Flag Investors Class A Shares.
- 37 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
NOTE 2--concluded
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
October 31, 1997 was $6,920, and the accrued liability was $19,880.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 40 million shares of $.001 par value
capital stock (15 million Flag Investors Class A, 20 million ISI Class, 2.5
million Flag Investors Class B, 500,000 Flag Investors Class D and 2 million
undesignated). Transactions in shares of the Fund are listed below.
Flag Investors Class A Shares
---------------------------------
For the For the
Year Ended Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Shares sold 167,474 200,140
Shares issued to shareholders on
reinvestment of dividends 101,621 114,250
Shares redeemed (606,069) (736,822)
----------- -----------
Net decrease in shares outstanding (336,974) (422,432)
=========== ===========
Proceeds from sale of shares $ 1,785,725 $ 2,079,607
Value of reinvested dividends 1,072,730 1,200,959
Cost of shares redeemed (6,423,913) (7,734,234)
----------- -----------
Net decrease from capital share transactions $(3,565,458) $(4,453,668)
=========== ===========
ISI Class Shares
---------------------------------
For the For the
Year Ended Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Shares sold 382,670 585,014
Shares issued to shareholders on
reinvestment of dividends 224,594 246,345
Shares redeemed (1,295,279) (924,026)
------------ -----------
Net decrease in shares outstanding (688,015) (92,667)
============ ===========
Proceeds from sale of shares $ 4,060,401 $ 6,198,720
Value of reinvested dividends 2,370,561 2,588,981
Cost of shares redeemed (13,720,577) (9,754,108)
------------ -----------
Net decrease from capital share transactions $ (7,289,615) $ (966,407)
============ ===========
- 38 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $30,711,360 and sales of investment securities aggregated $41,685,157
for the year ended October 31, 1997.
On October 31, 1997, aggregate net unrealized appreciation over tax cost
for portfolio securities was $4,027,077, of which $4,186,285 related to
appreciated securities and $159,208 related to depreciated securities.
NOTE 5--Net Assets
On October 31, 1997, net assets consisted of:
<TABLE>
<CAPTION>
<S> <C>
Paid-in capital:
Flag Investors Class A Shares $ 36,127,769
ISI Class Shares 76,949,687
Undistributed net realized long-term gains from security transactions 289,203
Unrealized appreciation of investments 4,027,077
------------
$117,393,736
============
</TABLE>
- 39 -
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Managed Municipal Fund, Inc.:
We have audited the accompanying statement of net assets of Managed
Municipal Fund, Inc. as of October 31, 1997, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Managed Municipal Fund, Inc. as of October 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
November 26, 1997
- 40 -
